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My wife and I have stock options which we would like to exercise. Is the AMT a lower percentage for smaller amounts versus larger amounts? In other words, would it be less expensive if we cashed in let's say $100k per year, over five years, versus $500k all in one year? Is the AMT a set percentage regardless of amount therefore we should be indifferent?
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Is the AMT a lower percentage for smaller amounts versus larger amounts?

Yes. Barely. 26% on AMTI under $175k, 28% on amounts over $175k.

In other words, would it be less expensive if we cashed in let's say $100k per year, over five years, versus $500k all in one year? Is the AMT a set percentage regardless of amount therefore we should be indifferent?

The only way to know this is to run the numbers for your particular situation. Unfortunately, there is no good rule of thumb.

I'd project your taxes over the next 5 years without the option exercise, then run it again with the exercise all at once, and once more with the exercises spread out over the 5 years. That will give you some idea of your potential tax hit and whether spreading the exercises out over a period of time will save you any significant taxes.

Also keep in mind the investment risk you take by not exercising. If the value of your company stock goes down in the future, the drop in value could easily overwhelm any tax savings you might see. Then again, exercising now might cut you off from any future appreciation in the stock (if you immediately sell the stock, that is).

What I'm saying is that exercising your stock options is more of an investment decision than a tax decision. That's not to say you should ignore the tax impact of exercising - you really do need to know what that will be. But don't let a few dollars of taxes one way or the other keep you from doing what you need to do from an investment perspective.

--Peter
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Also keep in mind the investment risk you take by not exercising. If the value of your company stock goes down in the future, the drop in value could easily overwhelm any tax savings you might see. Then again, exercising now might cut you off from any future appreciation in the stock (if you immediately sell the stock, that is).

If he's worried about investment risk, he could buy puts on the company, and/or sell calls if he's quite certain it won't go up.
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Everything Peter said is correct. You have to run the numbers.

I would add another question. You didn't indicate if these are qualified/incentive stock options (ISOs) or nonqualified options (NSOs). The difference is that an NSO is treated as regular compensation for all purposes, not just AMT.

An NSO, therefore, seldom results in a significant AMT liability all by itself.

An ISO, however, does have significant AMT ramifications.

But if you're going to turn around and resell the stock after you exercise, (or within a year) it won't make any difference which kind it is. You will have regular ordinary income either way.

Also be aware that if you do have an AMT liability, it's a deferral item, which results in a minimum tax credit carryforward. You also have a higher basis in the stock for AMT purposes. Just a couple more things to keep track of.

Bill

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There's a board specifically devoted to employer stock options -- this link should take you to it:
http://boards.fool.com/Messages.asp?mid=17307682&bid=100161&days=365

You could go back a couple years -- when the board was active -- and probably find a lot of answers to many questions on the topic.

Another good source is www.fairmark.com

If you still have interest (I realize some time has passed since you posted; I just hadn't been visiting the Fool all that often recently) let us know what questions you still have.

mathetes
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