Incentive Stock Options (ISOs)
Some employers use Incentive Stock Options (ISOs) as a way to attract and retain employees. While ISOs can offer a valuable opportunity to participate in your company's growth and profits, there are tax implications you should be aware of. Mac Neal LLC will help you understand ISOs and fill you in on important timetables that affect your tax liability so you can optimize the value of your ISOs.
Mac Neal LLC can help you optimize the value of your ISO and also file your taxes and tax plan from year to year.
ISOs are not subject to ordinary income tax when exercised but are subject to Alternative Minimum Tax. Most people are not subject to AMT if they are not exercising options. Mac Neal LLC understands the complexities of AMT and have developed a spreadsheet where you can visually see how your ISO would be taxed based off of
- Exercise your option to purchase the shares and hold them
- Exercise your option to purchase the shares, then sell them any time within the same year.
- Exercise your option to purchase the shares and sell them after less than 12 months, but during the following calendar year.
- Sell shares at least one year and a day after you purchased them, but less than two years since your original grant date.
- Sell shares at least one year and a day after you purchased them, and at least two years since the original grant date.
What are Incentive Stock Options?
A stock option grants you the right to purchase a certain number of shares of stock at an established price. There are two types of stock options—Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs)—and they are treated very differently for tax purposes. In most cases, Incentive Stock Options provide more favorable tax treatment than Non-qualified Stock Options.
If you have been granted stock options, make sure you know which type of options you received.
If you are not sure, take a look at your option agreement or ask your employer. The type of options should be clearly identified in the agreement.
What is the Alternative Minimum Tax?
The AMT is a parallel tax system that operates in the shadow of the regular tax, expanding the amount of income that is taxed by adding items that are tax-free and disallowing many deductions under the regular tax system.
- To figure out whether you owe any additional tax under the Alternative Minimum Tax system, you need to fill out Form 6251.
- If the tax calculated on Form 6251 is higher than that calculated on your regular tax return, you have to pay the difference as AMT in addition to the regularly calculated income tax. It can result in you paying hundreds or even thousands of dollars in additional taxes.
Why would I have to pay the AMT?
The simplest way to see why you are paying the AMT, or how close you came to paying it, is to look at your Form 6251 from last year.
- Compare the Tentative Minimum Tax to your regular tax (Tentative Minimum Tax should be the line above your regular tax) to see how close you were to paying the AMT.
- Look for entries on lines 2 and 3, which adjust your taxable income for AMT purposes.
For instance, you have to put various items back into your income, adding such items as your standard deduction, taxes deducted on Schedule A, the bargain element of any incentive stock options you exercised, as well as several investment related items.
Our developed spreadsheet will make knowing would you have to pay AMT much easier!