3 Tax Traps When Exercising Incentive Stock Options
ISO Tax Traps
Exercising ISOs can be a smart wealth-building move, but the tax timing matters. These three traps are the ones most likely to surprise employees with stock compensation.
Triggering AMT by exercising too many ISOs in one year
The spread between your exercise price and the stock’s fair market value becomes AMT income — even though you haven’t sold the shares yet. You may avoid AMT if the spread is less than about 20% of your total income, but have a tax pro model it first.
Selling before a year has passed since exercising
Selling early can make sense if you’re less bullish on your company stock, but the gains may be taxed at ordinary income rates as high as 37% instead of the lower long-term capital gains rate if you hold long enough.
Forgetting about AMT credits after paying AMT
Any AMT you pay creates an AMT credit that you can get back over time as you sell the shares. This helps avoid being taxed twice, and it’s something retail tax software doesn’t always catch.
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Schedule a call to model ISO exercise timing, AMT exposure, and the tax impact of selling shares.
