Actually that article is a bit misleading. Option plans are classified into either 'incentive' or 'non-qualified' at the time of issue (I believe there are others, but these are the common ones). Each option type is treated differently for tax purposes. Note, though, that non-qualified options are still designed to incent the employee-it's just that it is 'non-qualified' for tax purposes.
Options set up as incentive have a tax break if you excercise the option and hold the resulting shares. However, that tax break does not extend to AMT, hence all the fuss.
Much more common, especially for non-executives, is the 'non-qualified' plan (and perhaps the AMT problem makes it preferable anyway). These are taxed AS INCOME on the difference between strike and market on the day of excercise, whether or not you hold the stock. In fact, 42% of the 'profit' is subject to withholding.
For example, you joined DELL a year ago and have 100 options priced at $30. If you excercise the options at $90, you have a gain of $60 per option or $6000 total. You will lose $2520 in tax and get a check for $3480. If you want to keep the shares, you would need to write a check for $2520+3000. Some people will sell enough shares to pay all the costs, and keep the rest -- although that's the same as selling all the shares, putting the $3480 in Schwab and buying DELL at $90.
So basically, the majority of options are taxed such that when you exercise you MUST sell most or all of the shares to cover the strike and taxes. AMT is only relevant to a very small group of option holders. I'm not sure 'incentive stock options' are given out any more, most people just get 'non-qualified' options.
I hope that was clear!
Richard |
