The Stock Options Book

From Chapter 3, "Tax Treatment of Incentive Stock Options" (footnotes omitted)

The spread on exercise of an ISO is subject to alternative minimum tax (AMT) in the year of exercise unless the stock is sold in the same calendar year. When the stock market bubble popped in 2000, many optionees who had failed to focus on the effects of the AMT were unpleasantly surprised to see substantial tax bills despite the fact that the value of their stock had subsequently declined below the exercise date price. At that time, the newspapers were full of stories about Silicon Valley executives who had held onto stock acquired at the height of the boom without considering the AMT consequences. In the down market, these executives found themselves with huge AMT bills and insufficient assets to satisfy the liability. Relief for anyone still suffering those effects was included in the financial rescue legislation passed by Congress in October 2008. That bill abated tax liability, interest, and penalties that were outstanding prior to the 2008 tax year, and raised the refundable AMT tax credit for tax years 2008 and 2009 by the greater of 50% of the unused minimum tax credit for the preceding years, or 100% of the AMT credit determined with respect to the prior tax year, regardless of the person's income. Because this relief does not extend to those who exercised ISOs in early 2008 and did not sell the stock during the year, we may once again hear stories of optionees whose AMT liability exceeds their ability to pay it if optionees fail to note this problem prior to December 31, 2008. The experience of the dot-commers emphasizes the need to respect the special rules for ISOs in regard to AMT and disqualifying dispositions. These rules require careful considera­tion of potential effects that the AMT rules will have on filing Section 83(b) elections for ISO purposes. It is advisable for many employees who exercise ISOs for restricted stock to file Section 83(b) elections exactly as though they were exercising NSOs. Moreover, the rules will apply to trigger certain planning possibilities as well as pitfalls for optionees who expect to make disqualifying dispositions of their ISO stock in a year other than the year of exercise.