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Lesson 9. Taxes and Options > The 30-Second Recap - Pg. 46

Taxes and Options 46 This adjustment is equal to the difference between the exercise price and the fair market value of the stock or the spread. You would report this amount as ordinary income if you were exercising nonqualified stock options. It is impossible to tell just from the spread whether you will have to pay AMT, but the larger the spread, the more likely you will face an AMT bill. Caution Alternative minimum tax rules make it hard to know when it will apply. Some tax preparation software will alert you to the possibility, but professional help is usually the best course of action. AMT Summary It is not possible to cover alternative minimum tax in detail within the scope of this book. However, it is important to be aware of several factors regarding AMT: · · · · A large long-term capital gains liability can trigger AMT. A combination of several items on your return can trigger AMT. Taxpayers have an AMT exemption depending on their income. Exercising incentive stock options triggers an AMT adjustment that can consume your exemp- tion. · The only way to know for sure whether you owe AMT is to calculate your income taxes under the ordinary rules and under the AMT rules. If the tax is lower under ordinary income tax rules, you owe AMT. Caution Some states have their own version of the alternative minimum tax. Check with your tax expert to see how state tax laws impact your options. The 30-Second Recap · Ordinary income is everything that is not a capital gain, such as salary, dividends, interest, and so on. · When you sell a capital asset (stock) for a profit (or loss), the result is a capital gain (or loss). · Profit from a stock held for more than one year is long-term capital gain. The tax on long-term capital gains is 20 percent. · Your taxable income determines your tax bracket. · A large long-term capital gain or exercising incentive stock options may trigger the alternative minimum tax.