Write my Essay on Stock price

 

Suppose the stock price drops to $20:
Pay AMT Disqualify by early sale t, = .30 Disqualify by early sale t9 = AO Salary 5140,000 x .28 = 439,200 5140,000 x .30 = $42,000 5140,000 x .40 = $56,000 ESO 5150,000 x .28 = 547 000 5100,000* x .30 = $30,000 5100,000′ x .40 = 540.000 $81,200 $70,000 596,000
* ESO gain if disqualify = ($20 — $10)10,000 = $100,000.
Suppose the stock price drops to $15: Pay AMT $140,000 x .28 = $39,200 $150,000 x .28 = 542.000 $81,200
Salary ESO
Thus disqualify
Disqualify by early sale ; = .30 $140,000 x .30 = $42,000 $50,000* x .30 = $15 000 $57,000 Thus disqualify
• ESO gain if disqualify = (515 — 510)10,000 = $50,000.
Many employees who exercised ISOs in the early 2000s could not take advantage of the AMT tax credit. In December 2006, Congress passed a bill allowing taxpay-ers with AMT tax credits outstanding more than 3 years to claim $5,000 or 20% of the credit, whichever is greater,
Thus do not disqualify
Disqualify by early sale tp = .40 5140,000 x .40 = 556,000 $50,000* x .40 = $20,000 $76,000 Thus disqualify
each year 2007 through 2012. The credit offsets regular tax and is even refundable. The credit is phased out for higher. income taxpayers (2% reduction for each $2,500 of income above $234,600 for married taxpayers filing jointly).
Discussion Questions 1. Why is the list of compensation alternatives in Table 8.1 not necessarily ordered from most desirable to least desirable for an employee? 2. Why might salary be preferred to deferred compensation even if the employee’s tax rate is falling over time? Illustrate your answer using the changes in tax rates introduced in the TRA 86. Was salary preferred for both higher- and lower-compensated employees? 3. In determining the tax advantage of a current salary contract versus a deferred compensation con-tract, why is it useful to set the contractual terms so as to hold one party indifferent to the choice of the contract? Does it matter whether the employee or employer is made indifferent between the two choices? 4. With the change in marginal tax rates in the TRA 86, would it have been tax disadvantageous for tax-exempt institutions such as Stanford University to establish deferred compensation arrangeme:17 • r 1986 for their employees? Why might such institutions not have established these programs a;
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