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Subject:  AMT
Date:  Thu, 25 Mar 2004
From:  Alex

Hello Michael,

I read your article on "The Amazing Disappearing AMT Credit" dated 7/28/99 and got even more confused than I was before with ISO issues. Has anything changed for the better since that time?

I was granted an ISO during September, 2000 at $2.50. Now the value is $35. I have not exercised my option yet and would like to know what you recommend for me to do.

1. If I exercise now, would I have to pay AMT right away or can I wait until 4/15/05 and pay it then?
   
   
2. Will I be penalized by the IRS if I don't pay the AMT in quarterly installments?
   
   
3. If I exercise before April 10, 2004 and sell on April 12, 2005, could I use the proceeds from the sale to pay the AMT for 2004?
   
   
4. What is the best option to make everybody happy and not regret afterwards that I didn't do the right thing?
   
   
5. A lot of people in my company are frustrated with IRS issues and overpaying too much. Could you suggest what to do to make it simple?

Answer

Hello Alex,

Things haven't changed for the better since I wrote that article. The AMT situation is worse. More and more people are becoming subject to the AMT.

I can't give you a "correct" answer to your question. It requires individual analysis based on your situation. As a blanket statement, high income individuals who are residents of high tax states like California are probably better off selling the shares when they exercise their ISOs.

1. As long as you pay the required estimated taxes or withholding based on your 2004 income tax liability (for high income taxpayers, 110% of last year's tax), there is no penalty for paying the balance on April 15, 2005.
   
   
2. See 1.
   
   
3. You need to be able to have enough time to receive the proceeds from the sale to pay the tax on April 15.
   
   
4. Get a crystal ball. Mine is broken. What is your tolerance for risk?
   
   
5. Get out of "civilization" and live in a commune on a desert island. Alternatively, get a good tax advisor to help you manage the complexity.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.