Hunting for information about taxation issues pertaining to incentive stock options, such as AMT? Try Michael Gray’s Incentive Stock Option Frequently Asked Questions. You can also access archives for his newsletter here which he describes as “[a]n irregular newsletter for employees with tax issues relating to employee stock options.”
More on AMT from an article published by the Journal of Financial Planning: “The AMT: Pitfalls and Solutions.” The article discusses AMT issues related to incentive stock options, including this summary of a “worst-case” scenario:
The absolute worst-case scenario is when the stock plummets during the holding period, as it did for many high-tech employees in 2000, 2001, and 2002. For example, take an executive with incentive stock options whose strike price is $500,000 but whose market price has tripled to $1.5 million. Under the AMT, the $1 million bargain element would result in a tax of $280,000. But instead of dropping to a point still above the strike price, the price drops precipitously and the stock becomes worthless, or too low to sell (emotionally). The client is unaware that a disqualifying disposition would negate the AMT. Thus, the stock is not sold and there is no AMT credit. In this tragic case, the executive experiences a double-whammy: the out-of-pocket cost to exercise the ISOs ($500,000) and the AMT tax ($280,000). Make that a triple- or quadruple-whammy, since the stock is worthless and the executive is out of a job. Can it get any worse? Yes—the executive borrowed the $500,000 to exercise the ISOs and now cannot repay.
And finally, the National Center for Employee Ownership also has an article entitled “Stock Options and the Alternative Minimum Tax (AMT).“
UPDATE: Kerry Kerstetter, who writes the TaxGuru-Ker$tetter Letter, reminded me about the Reform AMT website which is dedicated to correcting “an injustice created by the way in which the Alternative Minimum Tax (AMT) is inappropriately and unjustly imposed upon owners of incentive stock options.” There is a great deal of good information there about pending legislation.
FURTHER UPDATE: Joe Kristan of RothCPA.com also reminded me about the recent Tax Court case of Ronald J. Speltz, et ux. v. Commissioner , 124 T.C. No. 9 in which ISOs and AMT were the focus of the case. More on AMT from RothCPA.com at this link, including a letter from the taxpayer’s attorney in the Speltz case.