Thursday, June 07, 2007

Salary, Stock Option and AMT

Recently, my friend Dean wrote this humorous article about Stock Options and Alternative Minimum Tax (AMT).

I got tired of this guy trying to sell stock option and quoting income I need to clarify something.

You might think UNCLE Sam is dumb but he is ACTUALLY very smart.

Some guy invented stock option to try to cheat tax but they didn't get away with it.

Apparently, some people don't report the GAIN ON stock option so UNCLE same got smart and started to ADD gain to the stock option AS INCOMES.

That is why you see a lot of inflated income in the silicon valley. Next time, add all your wages and then compare them to your w2, you will notice that sometimes your w2 have lot more
in box 2? Why because they added your gain on option to your income. So you might be only earning $40,000 but you received $40,000 so the compensation will become $80,000. BTW; companies are smart, they give out stock options through the brokers. Brokers get money when you sell. Because of AMT, most people sell on the same day they exercise (they still make money if you lose money), it is bad to hold options long time because of of AMT.

Next time if this guy tells you he is stock option broker ask him or her what is AMT and why is it so lucrative for Uncle Sam. Options are inherently dangerous, it is like gambling. I have a book over 1000 pages long about options, if you are bored I can lend it to you.
If you haven't heard of AMT, take a look at the following article:

Alternative Minimum Tax 101