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Lesson 10. Taxes and Your Options > The 30-Second Recap - Pg. 50

Taxes and Your Options Tip 50 Incentive stock options are more attractive to folks in the higher income tax brackets, but can benefit anyone. Taxes and Incentive Stock Options To review the basic rules regarding exercising incentive stock options (ISOs) and their tax treatment, see Lesson 5, "Incentive Stock Options." · No ordinary income tax is due when you exercise ISOs, although it may trigger an alternative minimum tax problem. · The ISO holding period is one year after the exercise and two years after the grant. · Stock acquired through an ISO is at the long-term capital gains rate if held for the required period. · If you violate any of the ISO rules, the options become nonqualified and you owe ordinary income tax on the spread. Under normal circumstances, exercising an incentive stock option is not a taxable incident. The lower your income, the less likely you will have to deal with an alternative minimum tax when you exercise ISOs. You can hold stock bought through incentive stock options that meet all the requirements without tax liability until sold. This feature makes them very attractive, especially to people in the higher income tax brackets. You have to hold the stock at least one year to keep the favorable tax status of ISOs. After that year, your tax is 20 percent on any gain from the price you paid for the stock. The largest tax trap for incentive stock options is the alternative minimum tax. There are two places in the process where AMT is a factor: · When you exercise ISOs, you may trigger an AMT problem. · If you hold stock bought through an ISO with a huge long-term capital gain, you face another potential AMT problem. Caution Dealing with the alternative minimum tax is not for the ill-prepared. If you are not a tax expert, you will need to consult one to deal with AMT and incentive stock options. If you violate the rules regarding ISO holding periods, they automatically become nonqualified stock options and you owe ordinary income tax on the spread. There are circumstances, such as death, where transferring the ISO to another person before the holding period expires does not cause the options to lose ISO status. Consult a tax expert for more information on early disposition and tax status. The 30-Second Recap · As a rule, nonqualified stock options present fewer tax problems than incentive tax options. · Timing may help you work around some tax issues by shifting or splitting tax liabilities into dif- ferent tax years. · The alternative minimum tax is very complicated. Summarizing it with any accuracy for each individual taxpayer is impossible. · Incentive stock options present special circumstances that trigger the alternative minimum tax.