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What traps for the unwary exist for employees exercising incentive stock options?
One of the major tax benefits provided by incentive stock options (ISOs) is the deferral of income recognition until the sale of stock. While most taxpayers are aware that they are not required to recognize regular income tax upon the exercise of an ISO, most are unaware that the exercise may possess Alternative Minimum Tax (AMT) implications. For AMT purposes, the favorable tax treatment afforded ISOs is disregarded. Consequently, many employees are often shocked (and unprepared to pay) the AMT liability generated by the exercise of ISOs.
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