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Thursday, February 22, 2007

Tax issues with stock options and AMT

Kiplinger.com recently reported a story about a couple caught by the AMT, causing them to incur a tax liability of $260,000 on income they never received. The cause: exercising of the incentive stock options prior to the stock market burst in 2000.

Due to the way incentive stock options are treated, their exercise required the couple to prepay taxes on the paper gains at the time of exercising the options even though they had not yet sold the stock. As the stock market collapsed subsequently, they ended up with a huge loss on the stock but they had to pay taxes on their paper gains. Result: they lost all their savings and had to borrow substantial money to pay their state and federal taxes.

For the complete article, check out the link below:

Kiplinger.com: The Beginning of the End of Tax Hell

I have heard similar horror stories of other people. That's why I have become leery of stock options. If I ever work for a company that gives it, and if I ever exercise them, I will sell the stock right away so as to lock any gains, rather than pay taxes on paper gains.

posted by Ruby @ 8:14 AM

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