As always, one of the easiest ways to push down what you'll owe the IRS next spring is to pump up your charitable contributions. If you haven't already made your year-end commitments, consider donating appreciated stock this year.
Donating appreciated stock has a clear advantage over writing a check. Assuming you itemize deductions and have owned the stock for more than a year, you can deduct the full value of your gift and avoid paying taxes on the appreciation.
This double-duty donating beats giving cash even if you don't want to part with a stock. You can give away the shares and use the cash you would otherwise have contributed to buy identical shares. End result: You maintain your investment position, you get the same tax deduction, and the charity gets the same gift because it doesn't have to pay tax on the appreciation.
— About those stock options. While the booming stock market and proliferation of high-tech companies have fueled an increase in charitable giving, they have also added to the complexity of year-end tax planning. One in 10 nongovernmental employees now owns stock options, a 12-fold increase over the past decade. And this new currency comes with some complicated tax strings attached.
Stock options come in two flavors — incentive stock options (ISOs) and nonqualified stock options (NQSOs) — that are taxed differently.
When you exercise NQSOs, the difference between the option price and the current value of the shares is treated like salary and reported on your W-2 form. Exercising options in December will trigger 2000 income, while waiting until January pushes it to 2001.
With ISOs, the spread between option price and share value is not taxed right away as regular income. Instead, you pay when you sell the stock acquired with the option But exercising ISOs can expose you to the AMT, the dreaded alternative minimum tax. This tax covers more kinds of income and allows fewer deductions and credits than ordinary income tax. It comes into play if it makes you pay more than the regular rules would.
IRS statistics show that about 825,000 taxpayers were bitten by the AMT in 1998, and 1.3 million are expected to be hit this year.
If your exercise of options threatens to throw you into the AMT, there is a way out. If you sell the stock within 12 months of acquiring it, an ISO basically becomes a NQSO, with the spread counting as income for the regular tax, not the AMT.