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J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return by J.K. Lasser Institute

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2.16 Stock Options

Employees receiving statutory stock options do not incur regular income tax liability either at the time the option is granted or when the option is exercised. However, the option spread is generally subject to AMT (23.2). Statutory options include incentive stock options (ISOs) and options under an employee stock purchase plan (ESPP). Employees receiving nonstatutory (nonqualified) stock options generally must include the option spread in income for the year the option is exercised unless the stock does not become vested until a later year.

Incentive stock options (ISOs).

A corporation may provide its employees with incentive stock options to acquire its stock (or the stock of its parent or subsidiaries). For regular income tax purposes, ISOs meeting tax law tests are not taxed when granted or exercised. Income or loss is not reported until you sell the stock acquired from exercising the ISO. The option must be exercisable within 10 years of the date it is granted and the option price must be at least equal to the fair market value of the stock when the option is granted. If the fair market value of stock for which ISOs may first be exercised in a particular year by an employee exceeds $100,000 (valued at date of grant), the excess is not considered a qualifying ISO. An ISO may be exercised by a former employee within three months of the termination of employment; if exercised after three months, income is realized under the rules for nonqualified options, discussed ...

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