What is the taxable income when exercising ISOs?
There is no taxable income per se unless you “disqualify” the transaction (described in #15 below). You still need to calculate the total dollar value of the in-the-money factor on all of the ISOs exercised. Example: if you exercise 1,000 options with a strike price of $31 and the current market value is $41, then the in-the-money factor is $10,000 [ (41-31) x 1000 ]. This calculated amount is a “tax preference” that is used in the federal calculation of Alternative Minimum Tax (AMT). There is no AMT in Illinois, but there is in Wisconsin and some other states. Depending on many other variables on your tax return, AMT can range from 0 – 35%. Since there is no ordinary tax, there is no withholding of any kind when exercising an ISO.
