1. On January 1 st , three years ago, Randy was awarded 15,000 ISOs at an exerci

Question

1.      On January 1st, three years ago, Randy was awarded 15,000 ISOs at an exercise price of $3 per share when the fair market value of the stock was equal to $3. On April 17th this year, Randy exercised all of his ISOs when the fair market value of the stock was $5 per share. At the date of exercise, what are the tax consequences to Randy?

(a)            $0 W-2 income, $30,000 AMT adjustment.

(b)            $0 W-2 income, $75,000 AMT adjustment.

(c)            $30,000 ordinary income, $30,000 AMT adjustment.

(d)            $75,000 ordinary income, $0 AMT adjustment.

Explanation / Answer

When Randy exercise Incentive stock option, there will be no tax impact however Randy has to declare Alternative Minimum Tax (AMT) adjustment by filling the form 6251. Here the AMT adjustment will reflect the amount of $75,000 that is the 15000 ISO multiplied by market price of share that is $5. hence answer is (B)

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