I'd like to know how to roughly calculate tax for stock options, for the following fictitious scenario:
Suppose Little Susie joined a rare private company in California as a normal employee, and Little Susie is granted some ISO stock options. These stock options are not forward exercisable. Suppose she is granted 40,000 units and she vests 25% after her first year.
Now, at the time she joined, the strike price is $1. The company does REALLY well, and had another round of funding that will value the stock price to be ~$40 per share, but her exercise price is still $1. Suppose her first year cliff is next month - meaning she has the choice of exercising 10,000 units for a total of $10,000 exercise price. Suppose that there's a (sufficient) possibility she may quit or get fired any time, and thus, wants to exercise as much as possible so as to not leave with $0. However, she has strong faith that the company will do well and IPO some time in the future.
Does this technically mean that she has to pay AMT on $400,000? And if so, is %28 the AMT for this sum? (0.28 * $400,000 = $112,000)? Or does she have to include her salary on top of that before calculating AMT? (Suppose in the fake example that her salary is $100,000 after 401k).
How does California state tax come into play for this?
When would she have to pay the taxes for this huge AMT?
Suppose in the worst case, the company goes completely under. Does she get her massive amounts of tax back? Or if it's tax credit, where can I find more info on this?
Is there any way to avoid this tax? (Can she file an 83b election?)
Any advice for Little Susie on how she can even afford to pay that much tax on something she can't even sell anytime soon? Should she take out a loan? (e.g. I've heard that in the extreme case, you can find angel investors who are willing to pay all your taxes/strike price, but want 50% of your equity? I've also heard that you can sell your illiquid shares on SecondMarket?)
Is she likely to get audited by IRS for pulling something like this?
Fake scenario aside, I will still seek professional services to file my taxes next year (I'm guessing a CPA can do this?) but just wanted to understand the formulas for AMT.