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Subject:  ISO Sale
Date:   Fri, 22 Jul 2005
From:   MMC

Mike,

I have been granted ISOs at 3 different consecutive annual intervals. Since the stock never did much until this year, I just let the options sit unexercised. Now I have a big chunk of vested, unexercised ISOs. Now the price of the stock has increased dramatically. If I exercise now and hold the shares, the risk of the stock price dropping below the current level is high.

Now I think I would be better off just selling the shares immediately after the exercise. Should I assume at least a 50% tax burden? I'm in the highest marginal tax bracket now.

Thanks,
MMC

Answer

Date:   Mon, 08 Aug 2005

Hello MMC,

The maximum federal tax rate is 35%. Add the maximum tax rate for your state. (For California it's 9.3%, 10.3% for taxable income over $1 million.)

There is no AMT adjustment when ISO shares are sold in the year of exercise, provided there is no "wash sale" (purchase of similar securities within 30 days before or after the sale).

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.