I have gone through the FAQ and Fool School, and it helped some. But I still need some clarification.I'm trying to figure out how to deal with some options that will be expiring in the not-too-distant future. My concern is a major tax hit. If I do a cashless exercise, I get a check. Since I never actually owned the shares, this is a short term gain(?). Or is it treated as ordinary income? If I understood the School it is ordinary income(?).I had an idea to deal with it, but want to know if I'm missing something. Is it still ordinary income if I take ownership of the shares? If I sell some shares obtained in the employee purchase plan I only pay long-term cap gains (20%) since I've held them for years. Because of the price differential between my option price and the current stock price I shouldn't have to sell too much. I then use the proceeds to BUY my option shares, thereby owing no tax on them(?). In the process I end up with more shares in my account, and only have to pay some long term cap gain instead of short term or ordinary income taxes.My ordinary income bracket is slightly higher than the long term rate (but lower than the short term!). So the long-term is preferable if I can do it.Ok...please tell me where I'm wrong...Thanks in advance.1poorguy
1poorguy,My understanding is that you owe the taxes on the stock even if you take ownership. That's what I did, and had to pay about 44% additional in federal, state, fica, and everything else they could think of. And I think it is going to kill me on AMT as well.So I think you may remain....1poorguy.Sorry.Beth
So I think you may remain....1poorguyI expected that anyway! :-(you owe the taxes on the stock even if you take ownershipIf I pay taxes upon exercise (as ordinary income - on the value of the stock when granted 7 years ago?), then I guess the only difference will be whether I take the cash or take the stock (I'm assuming the former will generate a short-term cap gain since I will have owned the stock for only a matter of minutes). So perhaps my selling idea still makes sense since I can sell my ESPP shares for a long-term gain, take ownership of the option shares, and pay only the tax I can't escape from anyway.Am I close?Thanks for the reply, Beth.1poor(er)guy
1poorguy,I think you are right on the money (pun intended). I learned the hard lesson when my options were at 17, the stock was at 55, and I chose to buy and hold, thinking it would hit 80. It closed just above 18 today. And I had to take out a loan to do it all. Another big mistake. Now I am alone with a loan.And I am really sorry that you are 1poor(er)guy. But you are thinking about ways to improve your finances, and that gives you an advantage over most people who ignore their finances most of their lives, and start thinking about it when the first social security check arrives and they realize they have saved about $1.98 for retirement.Beth
Hi Beth,Sorry for your being alone with your loan. I hope that situation improves for you.I have learned much about ISO options recently. Evidently I owe no tax upon exercise. Only upon sale, and then the gains are taxed at the prevailing cap gains rate. There is, as I understand it, an exclusion level below which I would not owe AMT either. I can't find a current number, but it probably is higher than any gains I would get, so I should be OK. I still want to find the number, though.Thanks for the input. See you around the boards.1poorguy
OK...what I thought I learned about ISO options was not correct. Thank Quicken for TurboTax...it made the very obtuse AMT form easy.In case anyone is curious, the trick appears to be to exercise only a portion each year. If you do it all at once you get nailed through AMT for some heavy taxes. However, running some scenarios through T-Tax I found that by exercising approximately 1/3 of my ISO options per year the tax implications become minor.So the moral of the story is: plan ahead with the ISO's and don't wait until they are about to expire before you exercise.1poorguy (who does not own any stock in any company associated with Turbo Tax, nor is affiliated in any way with the company, but just found it useful for this)
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