..Hello all..
..my son works for a private company that’s planning to go public next year..
..he’s got a wad of unexercised employee stock options..
..they’re in a lock up presently, but there’s hope the company will allow employees to exercise prior to the IPO..
..he’s tremendously worried about AMT, of which I know nothing..
..if anyone has pointers on where I can go to educate myself on the workings of AMT/Employee stock options/taxes/advice, I’d certainly appreciate it..
I suggest your son contact a tax professional in his state of residence.
While AMT can take a bite, there are other issues – like what happens to his options if he does not exercise them, if the company’s fortunes turn sour, etc.
I expect the Tax Pro is going to need to see documents regarding the stock options which hopefully you son has.
..yes, that’s the plan, but he was hoping to educate himself with any resources before seeing the experts, as he would have a better conversation as a result..
The best laid plans…
Yes, he’s right to plan for this, but he also needs to look at what he needs to do if the IPO doesn’t occur as planned.
Has he been exercising his ISOs as they’ve been vesting? If not, he should probably look at exercising at least some of them this year, if his goal is to avoid AMT. That said - the appropriate goal should probably not be to ‘avoid AMT’ - the goal should probably be to pay the least in total taxes, while still keeping the equity that he wants to hold in the company. Here’s an article that has a good explanation of considerations when your company IPOs, and has some links to other articles with more details and an AMT calculator
IPO Taxes: How will you be taxed at your company’s IPO? - Equity Simplified
I would suggest he get with the tax professional sooner rather than later, as exercising some of his vested options this calendar year may be beneficial for his taxes in the year the company IPOs.
AJ
After thinking about this some more, I would also point out that if he’s going to have to pay AMT because of the IPO, if there’s any other income that he can realize during the year that the company IPOs, like, say cashing in I-bonds or doing Roth conversions**, he should consider doing so, since that will help minimize the difference between his original tax liability and his AMT liability. I would also say that if he itemizes, if there are any of those deductions that can be put off to another year, he may want to consider doing that, again to minimize the difference. Again, he needs to talk to a tax professional about what he can do in his particular situation, and he should do so sooner rather than later.
For those who work for private companies and have been awarded options, you should be visiting with a tax professional on a plan to minimize your taxes in the event of an IPO as soon as you get those awards, rather than waiting until the company is likely to IPO. For ISOs, you would need to weigh the risks of exercising options (and the tax implications of that exercise) on a stock that may become worthless, or that you may not be able to sell easily, vs the risks of having to pay AMT if the company IPOs. A plan to exercise some options as they vest may help mitigate taxes in the long run, especially if you think there is a good chance that the company will eventually go public.
**Roth conversions can be subject to AMT, but AMT taxes are capped at 28%, so if your marginal bracket is higher than that, doing Roth conversions in a year when you pay AMT may be worthwhile.
AJ