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Subject:   Question on AMT and options
Date:   Wed, 12 Jan 2000
From:   Kipp

Hi, I just found your site. Great job in compiling useful information! I have a question which I didn't see covered by any of your FAQ's. Here goes:

I have both ISO and NQ options. The ISO's are due to expire and must be exercised. I'm in the highest tax bracket.

Is it wise to exercise and hold the ISO shares (thus putting me in an AMT situation) and also exercise and sell the NQ shares in the same year? I would still be in an AMT situation even after selling the NQ shares. The following year I would sell the ISO shares once the one year holding period has been met (thus making the gain on the ISO shares long term).

My thought is that this would reduce the taxes on the NQ from the ordinary income rate of 39.5% down to the 28% AMT rate. It would also make the gains on the ISO shares long term.

Thanks for any inputs you have on this!

Kipp

Answer

Date:   19 Jan 2000

Hello Kipp,

It can be advantageous to exercise NQOs in the same year you exercise ISOs.

You not only can reduce the tax rate for the NQOs, but reduce the AMT and make it easier to use the AMT credit.

It can be helpful to do tax projections to see how everything fits together.

Good luck!

Mike Gray

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

For more information about non-qualified stock options, request our free report, Non-Qualified 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.