Alternative Minimum Tax Complicates Lucrative Tech Stock Options

NEW YORK (MainStreet) — Facebook acquired mobile messaging service WhatsApp last month for $12 billion in stock and $4 billion in cash. That's good news for the app's founders and employees who will be paid $3 billion in restricted stock units. But tax season for WhatApp folks -- not to mention those at FB's recently acquired Oculus VR -- can get complicated because of the alternative minimum tax (AMT), which is a levy of about 28% on adjusted gross income over $175,000 plus 26% on amounts less than $175,000 minus an exemption depending on filing status.

"There are nightmare stories of taxpayers struggling to pay this tax and later selling their shares for much less than the exercise price," said Paul Jacobs, CFP and chief investment officer with Palisades Hudson Financial Group in Atlanta. "For someone who is subject to AMT, this tax break may not be much of a tax break at all."

AMT may be avoided by staying out of the $150,000 to $415,000 income range. For example, a taxpayer might be better off realizing a $1 million capital gain all in one year rather than dividing it into two or three years.

"For early stage companies issue options, we may advise filing an 83(b) election to exercise options before they are vested and before the stock price really ramps up," said Toby Johnston, partner with Moss Adams. "For later stage companies, we may advise a combination strategy of exercising and holding some stock to get long-term gain treatment while exercising and selling other options to generate ordinary income and manage the alternative minimum tax."

The difference between the value of the stock and the exercise price is taxed as ordinary income with Nonqualifying Stock Options (NSOs) upon purchase but with Incentive Stock Options (ISOs) the difference between the value of the stock and the exercise price is subject to the Alternative Minimum Tax (AMT) not regular tax.