Message Font: Serif | Sans-Serif
No. of Recommendations: 0
lynkev: I have read there's an alternative minimum tax that is due when you exercise the stock option (difference between exercise price and fair value of the stock), then when you sell the stock there's either long term or short term capital gains (depending on how long you hold the stock).

As you've already been told, the AMT is only a possibility when you exercise, assuming, that is, that you are talking of Incentive Stock Options (ISOs) and not Non Qualified Options, NQOs. Whether AMT becomes a reality depends on the size of the "bargain element" -- which is what you describe within your parentheses.

The bargain element for ISOs is a "preference item" in calculating Alternative Minimum Tax, and the law allows you a reasonable leeway in total preference items before AMT kicks in. Once it kicks in, though, there's no avoiding it. You are probably safe from AMT if your total "preference item income" is under $30,000 to $35,000, the exact amount varying according to income level and filing status (joint, single, etc.). The most common preference items that can also contribute to going over the line are the deductions you take (if any) for state and local income taxes and for real estate taxes. There are other preference items, but they tend to be somewhat esoteric.

I also recently read that if you exercise the stock option and it's more than 2 years since the option grant there's an advantage somehow. Can someone explain what that is?

When you sell stock acquired through an ISO exercise, regardless of whether you had to pay AMT, IF you have held it for at least one year and a day from the time you exercised it and at least two years from the date of the grant, THEN you pay long term capital gains on the gains. That second clause in the "If" statement is the one you are referring to. It's actually redundant in most option programs because most companies don't allow you to exercise until at least a year after the grant date anyway, so by holding it an additional year, you've automatically met the two year requirement.

By the way, your best source for more complete answers on these and any other question on Stock Options is, where a tax lawyer by the name of Kaye Thomas has assembled a very readable and complete presentation on the topic.

Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.