Question

Jay exercised an incentive stock option in the current year, paying $800 for stock worth $1,500 on the exercise date. He has not sold the stock. How much income should Jay report in the current year under the alternative minimum tax?

Answer 1

Incentive stock options's spread in the present case $700 ($1500-$800) is subject to Alternative Minimum Tax if if the employee continues to hold the stock at the end of the same year in which the option was exercised. In the other case that means if employee disposes the ISO before the end of same year in which option was exercised then capital gains or capital loss shall be computed and subject to federal income tax and not Alternative Minimum Tax

Therefore in the present question if Jay continues to hold ISO at the end of same year in which ISO was exercised then spread ( FMV on exercise date - Exercise/Strike price) will be subject to Alternative Minimum Tax. Here $700 is to be reported in the current year under Alternative Minimum Tax.

If Jay sells ISO before the end of year in which ISO are exercised no Alternative Minimum Tax is attracted.