Tax strategy for incentive stock options

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Tax strategy for incentive stock options

by Bshowalter » Sat Oct 05, 2013 3:01 pm

I have some incentive stock options that were granted to me by my company. I bought half of them a few years ago and as a result of the stock prices rise, paid AMT. The AMT was refunded the following year.

The stock options expire in a few years and I'd like to purchase the rest of the shares. The stock price has risen further and if I purchase the remaining shares I believe my AMT liability may be significant. I understand that the amount of AMT paid will be refunded in the following years. I had a thought about pre-paying extra tax to avoid the under payment penalty but it then occurred to me that reducing the amount of AMT would be a bad idea because then it wouldn't be refunded. 

Am I understanding this right? Should I just suck it up and be stuck with a big AMT payment or is there a better way to do this?

Bshowalter

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Re: Tax strategy for incentive stock options

by grabiner » Sat Oct 05, 2013 4:01 pm

It doesn't matter whether you pre-pay your tax or pay it with your return; you are considered to have paid AMT for the year you file your taxes, and can claim credit in a future year.

If you would have an underpayment penalty, that penalty cannot be refunded, because it is not tax. Therefore, if you do something which will cause you to owe a lot of tax this year, you should pay estimated tax or have more withheld in order to cover the minimum due to avoid a penalty (probably 110% of last year's tax). 

If you pay estimated tax now, you'll have to fill out Form 2210 to show how much of your income was earned in each quarter; normally, you are required to pay estimated tax equally in the four quarters, but if you earned half your income in the fourth quarter, you can pay half the tax in the fourth quarter without penalty. If you increase your withholding, the withholding is treated as having been made equally in all four quarters.

 David Grabiner