ISOs and AMT: improving the odds when gambling with the IRS.(incentive stock options, alternative minimum tax)

Tax Adviser, The, August, 2006 by Takacs, Natalie Bell

In a well-known song, "The Gambler," Kenny Rogers advises, "[k]now when to hold 'em, know when to fold 'em, know when to walk away, and know when to run." Although intended for card players, this advice should also be heeded by holders of incentive stock options (ISOs). ISOs can be a huge trap, because they appear to offer a wager that seems too good to pass up--the opportunity to convert ordinary income (generally taxed at 35%) into long-term capital gain (generally taxed at 15%).With an apparent 20% payoff, the wager seems enticing.

Under current law, however, the casino (i.e., the IRS) has two big advantages: (1) under Sec. 422, taxpayers must hold the shares for one year after exercise (or, if later, two years from the date the option was granted); and (2)...

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