Employees who exercised options this year should act soon to avoid a big tax bill later

Contact Information

Michael Gray

Certified Public Accountant

Michael Gray, CPA

408-918-3161

mgray@taxtrimmers.com

2008 could be a “perfect storm” for employees who exercised
incentive stock options (ISOs) earlier this year, but taking action
before the end of the year could avoid a big tax bill next April. With
the decline in the stock market, some employees may find they owe more
for income taxes than the stock is worth.



“Employees who exercised incentive stock options early in 2008 need
to remember that the excess of the fair market value of the stock over
the option price on the exercise date is subject to the alternative
minimum tax (AMT),” says Michael Gray, CPA, author of Employee Stock
Options – Executive Tax Planning and Michael Gray, CPA’s Option Alert
newsletter. “But there is an ‘escape hatch’. If the employee sells the
stock to an unrelated person before the end of the year of exercise,
the AMT adjustment is eliminated and the taxpayer will only pay tax for
additional wages on the excess of the selling price over the option
price.”



Employees who follow this strategy must avoid violating the “wash
sale” rules. “When you use the ‘escape hatch’, you can’t buy stock in
the same company back, or even receive or buy an option to purchase the
same stock back, during the period thirty days before to thirty days
after the date of sale, or you lose the ‘escape hatch’ benefit,” says
Mr. Gray.



Congress passed tax relief last October for employees who fell in
this tax trap in the “Dot Com Crash” of 2000 – 2001, but did not repeal
the AMT for ISO exercises in 2008 and thereafter.



Michael Gray, CPA gives tax planning advice to employees with stock
options. You can subscribe to his free newsletter, Michael Gray, CPA’s
Option Alert, and find a wealth of information about employee stock
options at www.stockoptionadvisors.com. His book, Employee Stock Options – Executive Tax Planning, 2008 Edition is available at Amazon.com.