Accredited Wealth Management Advisor Practice Exam

What is the nature of the tax implications for Charlene after exercising her stock options?

1. She has ordinary income of $97,500 and an alternative minimum tax (AMT) adjustment of $65,000.

2. She has ordinary income of $65,000 and no other tax implications apply.

3. She has ordinary income of $120,000 and an alternative minimum tax (AMT) adjustment of $15,000.

4. She has increased W-2 income of $97,500, subject to payroll taxes and federal withholding.

The correct answer is: She has increased W-2 income of $97,500, subject to payroll taxes and federal withholding.

When Charlene exercises her stock options, the nature of the income generated from this action is characterized as compensation income, which is reflected on her W-2. This income is subject to payroll taxes and federal withholding. The amount that Charlene recognizes as ordinary income upon exercising the options represents the difference between the market value of the stock at the time of exercise and the exercise price. In this case, with an increase in W-2 income of $97,500, Charlene is required to report that amount as part of her taxable income. Additionally, because this income qualifies as earned income, it will be subject to payroll taxes (Social Security and Medicare) and withholding for federal income taxes. This aligns with the treatment of stock options that are considered non-qualified, which leads to immediate taxation as ordinary income at the time of exercise. The other options present different combinations of ordinary income and alternative minimum tax (AMT) adjustments that do not align with the typical tax treatment of stock options at the point of exercise. Therefore, the correct assessment recognizes the specific implications categorized under W-2 income, which captures the immediate tax liabilities Charlene faces upon exercising her options.