Incentive Stock Options Basics – Alternative Minimum Tax and Incentive Stock Options

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Incentive Stock Options Basics

Employees often complain that while exercising incentive stock
options they have had to pay alternative minimum tax even when the share
prices had fallen. Incentive stock options are a type of an equity
compensation that offers alternative minimum tax benefit. It has become
more popular in recent times to compete with the nonqualified stock
options.

There are two disadvantages that nonqualified stock options have when
compared to its counterpart incentive stock option. Firstly, one has to
declare ones taxable income when one decides to buy stock and secondly
such as income is labeled as compensation. This income is taxed with a
higher rate when compared to a long-standing capital gain. Whereas in
the case of incentive stock option one does not have to declare ones
income and incase one decides to hold the stock for a long period of
time the gains made from the stock is treated as a long-standing capital
gain.

The advantage here is that the taxes are balanced by alternative
minimum tax. This complicated evaluation will force one to pay
alternative minimum taxes while implementing incentive stock options.
However the total alternative minimum taxes that ones pays under the
incentive stock option will be less than the ones that a nonqualified
option demands- one can recover the entire alternative minimum taxes by
declaring the credit on alternative minimum taxes in the near future. Incentive Stock Options Basics

The alternative minimum taxes was passed to prevent the higher income
group taxpayers from evading tax as they were capable of taking a
variety of deductions on tax. Incentive stock option offers tax benefit
to those employees who are willing to risk by holding onto the shares.
Sometimes these risks do not benefit the employees. It is a tragedy for
those employees who had took the risk without knowing the real
consequences.

Very few employees know about alternative minimum tax and are taken aback when they realize that they will have to pay.

Employees who plan to hold on to the incentive stock options must
take every precaution to see whether they have entered the alternative
minimum taxes territory. One can eliminate the alternative minimum taxes
by disqualifying a part of incentive stock options that year. It would
be best to exercise incentive stock options earlier during the year as
one can plan better if you wish to hold on to the stocks. This will also
allow one to contemplate better. Incentive Stock Options Basics