Stock options when offered by your employer may seem to be a very viable and beneficial option for you, especially incentive stock options (ISOs). When you go through the stock options factors including taxes, you may feel there is nothing much to know about and you can take care of everything. This is where it can become sort of problematic if you are not aware of basic and every tax detail related with your ISOs landprime.
To know more about what lies ahead we will have to first learn about the taxes related with ISOs:
When an employee held onto the option for at least a year, they have to pay capital gains tax.
When the employee holds the option for less than a year, they have to pay normal tax.
The third one which can prove to be a costly affair is Alternate Minimum Tax (AMT). this tax is charged when you hold onto your share after exercising the ISO and sell it the next calendar year they were offered. This tax is basically the difference between the fair market price of share on the exercise date and the price of the exercise.
Alternate Minimum Tax
The AMT is calculated in two steps. The tax is calculated under normal tax rules, along with factoring in the taxable income and the higher number is used to calculate the AMT. The deductions such as personal exemptions, real estate, medical, itemized deductions and so, coupled with the ISO exercise spread are also taken into account to calculate the AMT taxable income.
This is where incentive stock options can become a really perplexing game, and if we do not keep track of the finances and put them in proper order, we could end up paying more in taxes. You could take the help of Alternative Minimum Tax calculator to get an estimate on the AMT you would be paying on your stock options.
2 Points to Remember about AMT Liability:
When you exercise the ISO and held onto the share through the calendar year, the spread increases the AMT income for the year.