What are the limitations on exercising incentive stock options?

February 14, 2005

Subject:   What to do.
Date:   Tue, 25 Jan 2005
From:   Kristen

Hello – Your website was very useful and I learned quite a lot – Thank you!

I am fully vested in the following two ISO plans from my employer:

Exercise cost $50,000 (worth $225,000 today)
Exercise cost $100,000 (worth $375,000 today)

It is my understanding that I can’t exercise more than $100,000 per year. Is that correct?

Also, after exercising my options, I must hold the stock for a period of one year or more so the tax would be considered capital gains as opposed to ordinary income. Is that correct?

One issue I am not clear about is the “two years from grant” limitation. Both of my plans were granted more than two years ago and I am wondering how that affects me?



Date:   Wed, 09 Feb 2005

Hello Kristen,

Some of your assertions are not correct.

The $100,000 per year exercise limit is based on the option price and when the options first can be exercised.

Most importantly, you have neglected any discussion of the alternative minimum tax, which is critical in ISO planning.

I recommend that you read our report “Executive Tax Planning For Incentive Stock Options”.

Good luck!

Mike Gray

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

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