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Subject:   ISO stock
Date:   Wed, 13 Feb 2002
From:   Lance

Hi Michael,

I have a question about ISO stock. Last year, I gave some ISO stock to my relatives. When I gave the stock, it was less than 1 year since the day I exercised and less than 2 years from the grant day; therefore, my company included the value of the gift as my income on my W-2. Originally, I was thinking that I can give a gift of up to $10,000 to anyone and would not be taxed. This turned out not to be the case. Is there anything I can do to minimize my tax?

Thanks.

Answer

Date:   27 February 2002

Hello Lance,

You are one of those caught between the rules for income tax reporting and gift tax reporting. For 2001, you could make a gift of a present interest with a value up to $10,000 per donee and not be subject to gift tax. However, a transfer to anyone of ISO before the holding period requirements are met is a disqualifying disposition. Since this is not a transfer for which a loss (if realized) would be deductible, the ordinary income is the excess of the fair market value on the date of exercise over the option price.

You can't do any tax planning relating to this type of transaction after the year of sale. You might check whether you are subject to any penalties for underpayment of estimated tax. If you are, paying your tax early will stop the penalties from accruing.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.