Question

Your client, William Warrant, was hired for a management position at an Internet company planning to start a website called “indulgedanimals.com” for dogs, cats, and other pets. When he was hired, William was given an incentive stock option (ISO) worth $500,000, which he exercised during the year. Exercise of the ISO creates a tax preference item for alternative minimum tax (AMT) and causes him to have to pay substantial additional tax when combined with his other tax items for the year. He is livid about the extra tax and refuses to file the AMT Form 6251 with his tax return because the AMT tax is “unfair” and “un-American” according to him. Would you sign this tax return?

Answer 1

There is a clear cut difference between NSO and ISO. In NSO at the time of acquisition of stock tax to be paid on the balance of excess of grant price and acquisition price.

But in case of ISO only tax to be paid on the basis of the difference between selling price and acquisition price. It is advisable to this employee to hold ISO at least two years from the granting time or at least one year one day from the acquisition date. It reduced the tax liability at a substantial rate.

Here if he only exercises ISO, not sold it immediately then his tax liability will not raise. It is also informative to say people having income under income tax 10% and 15% bracket may levied 0% tax on it.

It is totally American and fair for making national income equality. He should not refused to file tax return ,because it will not harm him only for the acquisition.