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Date:   Tue, 18 Apr 2006
From:   Baiming

Michael,

I left a company in California two months ago and returned to New Jersey to work for another company. I am considering exercising vested incentive stock options from the previous company. Will I be taxed on the exercise even if I don't sell the shares that year? The company will be going public in a few months.

Regards,

Baiming

Answer

Date:   01 May 2006

Hello Baiming,

The excess of the fair market value of the stock over the option price on the date of exercise will be taxable on the alternative minimum tax schedules on your federal and California income tax returns. (That's right! It's AMT taxable income in California!)

That doesn't mean you shouldn't go ahead, but someone should be helping develop the cash you will need and advising you about whether it makes sense. You don't have much time because you must have been an employee of the company within three months before the date of exercise. Some options lapse sooner after separation from service.

This is a service that we offer.

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.