Stock Option Tax Strategies

Many companies today grant options which may be exercised over a number of years. Typically these will also vest over a period of 2-6 years. The options are granted at a certain price when received and hopefully the price will increase over the number of years employed. When exercised, the spread between the grant price and current market price is taxed as ordinary income. If the stock is held and not sold, the "spread" becomes an Alternative Income Tax preference item and is taxed in the year of exercise. Unless you have a crystal ball, it is usually wise to exercise and sell in the same year and avoid the AMT in the current year and a possible drop in stock price in the next taxable year. Holding the stock could leave you with a large tax bill and no money to pay the bill.

This taxable "spread" is sheltered by many individuals by using the write-off generated by an oil and gas program. Since the sale of the stock in the same year doesn't generate any AMT, the write-off generated by the Oil and Gas program may fully offset the taxable spread. You are highly encouraged to consult your accountant to make projections for and review your individual situation. Sophisticated tax planning software exists just for these kinds of situations.

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