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Facebook employees who exercised stock options may have a dilemma

Mon, 20 Aug 2012 16:25:52 EST

Facebook employees who exercised incentive stock options before the initial public offering might have to sell their shares to avoid the federal alternative minimum tax.

The federal alternative minimum tax is a different way to compute your federal tax liability. Income is increased for certain items like the excess of the fair market value of corporate stock over the option price when an incentive stock option is exercised. A tax credit for part of the alternative minimum tax may be allowed when the stock is later sold. There is an "escape hatch" - the tax increase is avoided if the employee sells the stock before the end of the year of exercise, because any gain from the sale is taxed as additional wages.

The "escape hatch" is subject to a "wash sale" rule. It doesn't apply if the employee buys the stock or an option to buy the stock back (called a "call") within 30 days after selling stock purchased using an incentive stock option.

"Many employees found their incentive stock options were a tax trap when the market value of tech stocks crashed at the end of 2000," says Michael Gray, CPA, author of Employee Stock Options - Executive Tax Planning, 2012 Edition. "Congress finally adopted relief legislation and made the minimum tax credit refundable, but that break expires at the end of 2012."

This is a dilemma for Facebook employees because the stock is suffering from a price decline from the $38 offering price to $18.75 on August 20. A reason for the decline is more shares are flooding the stock market.  The lock-ups for employees and other corporate insiders are expiring - 271.1 million shares were "unlocked" last week, and 1.2 billion shares are scheduled to be unlocked on November 14.  The initial public offering was for 421.2 million shares.  If the employees held onto their shares, the value could eventually recover, but the alternative minimum tax bill is a real problem.

Source: WebWire

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