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[s_finaid]

What are the consequences of exercising incentive stock options on financial aid eligibility?

The Facts:

This year we exercised incentive stock options that we had earlier reported as assets on FAFSA. When we exercised the options in March, we paid $5k for stock worth $25k for a paper gain of $20k.

We had originally planned to hold the stock for more than a year to qualify for the lower capital gains tax rate. Holding the stock also would mean that the $20k wouldn’t be reported to the IRS as income in 2008 (but it might show in our tax return when computing Alternative Minimum Tax liability -I’ve never done the AMT calculations so I’m not sure about this)

Now, with the stock worth less than $5k we have a loss as a result of exercising the options and are considering selling the shares. This would disqualify them for special tax treatment, and would result in the $20 k being reported to the IRS as income in 2008, but selling now might allow us to offset the paper gain and also reduce AMT exposure. The drop in the stock value hasn’t left us with enough to pay the 28% AMT, if in fact we will have AMT exposure.

Our income outside of this special options exercise, for the last several years and for the foreseeable future, is about $60k, so this is a very unusual year for us.

What is the best thing for use to do with these shares from the perspective of financial aid eligibility? Hold? Sell before year end? What do we have to report on FAFSA or Profile if we hold the shares? If we sell? Should we say something about this being an unusually high income year for us?

All of this is new and very confusing to me. Thanks for your help.

[Support]

Please try on some finance forums such as http://www.pftalk.com/.

[s_finaid]

I'll try the financial forum as you suggest; however, it is my experience that financial advisers know little about financial aid eligibility calculations.

I may not have composed my question clearly enough. Let me try again.

I need to know which action will increase my family EFC the the least. Should I sell the stock I acquired through ISO exercise this year or should I hold until a year passes? How are these courses of action recorded on FAFSA and Profile?