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Date:   Thu, 6 Jan 2000
From:   Paul

Relating to your ISO article, I am confused as to the AMT consequences if I were to exercise my options in 1999 and sell the stock in 2000, but before I held the stock for the 1 year holding period. Since it will be included as compensation income in 2000, am I still liable for AMT in 1999???

Thanks alot.

Answer

Hello Paul,

When stock received from exercising ISOs is sold before the end of the year of exercise, ordinary income equal to the lesser of the tax preference at exercise or the actual gain is reported as W-2 ordinary income. No tax preference is reported on the AMT form.

When the stock is sold the next year before the holding period requirements are met, the taxpayer will have the same results for "regular tax" reporting. For AMT, the taxpayer is required to report the tax preference for the year of exercise and will report a negative gain or loss adjustment on the AMT schedule in the year of disposition. In many cases, this means the taxpayer will have an alternative minimum tax in the year of exercise and a tax credit in the year of disposition.

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.