An employee who exercises ISOs will likely be subject to this tax. Under an ISO, all income is recognized when the stock is sold. Again, Tom must be careful of the AMT in the year of exercise. In addition to planning for the income tax effects of owning stock options, employees who receive options must plan carefully to benefit from these powerful assets. They often discover that they don't have enough cash to exercise the options and their options may expire before they can act.
Proper timing is vital in exercising options.
Generally, postponing the exercise makes sense because the necessary payment of cash is deferred. Option holders benefit from the appreciation of the stock without the requi site cash outlay normally associated with a stock investment. In addition, waiting defers the requirement to pay income tax at ordi nary income rates on the exercise of non qualified options. But sometimes early exercise of stock options is advised. Employees who feel their company's stock has reached its highest value may wish to exercise their options and sell their stock.