April 15 has come and gone, and many optical networking professionals are still feeling the sting in their wallets.

The problem is most acute for those saddled with the so-called alternative minimum tax (AMT), a separate tax system that often applies to employees granted stock options. The AMT, coupled with a plummet in the Nasdaq, has created a situation in which many employees can’t sell enough stock to cover their huge tax bills.

Some employees who exercised their incentive options when the market was at its height now find themselves with six-digit tax bills. Some companies are reportedly helping certain employees with loans and cash to help pay off the debt, but for the most part have been left on their own to muddle through.

“We don’t provide financial assistance,” says Steve Langdon, a Cisco Systems Inc. (Nasdaq: CSCO) spokesperson. “What we do is explain the issues to people when we allocate the options, and we refer people to professionals to help them plan.”

Employers can offer two kinds of stock options: nonqualified (NQSOs) and incentive (ISOs). Both kinds of options are taxed on the spread between the exercise price and the market price at exercise. But with nonqualified options, the company either withholds taxes from the proceeds of the sale of the stock or requires the employee to come up with the taxes it needs to withhold.

On the other hand, incentive options are not subject to income tax withholding when they are exercised. If an employee immediately sells the stock, the tax on the spread is paid in April with the annual tax return.

If he or she holds the shares and doesn’t sell them in the same calendar year they were exercised, at the end of the year two tax rates will be calculated: A tax on the regular income and the potential tax on the employee's options -- the AMT. That's when an employee can get socked with a huge tax bill, which, because of the lowered share price, can't be covered by selling stock.

“What happened this year is that the stock has dropped so low they can’t pay off the taxes,” says Bruce Brumberg, editor and chief of MyStockOptions.com, a site dedicated to providing information on options. “But they will get it all back eventually in the form of tax credits. The problem is that it takes a really long time for them to recoup the losses through the credits.”

While the AMT has been criticized this year, the truth is that people can benefit from it when the stock price is on the rise. For example, if a share price has risen only nominally after the stock options are exercised, the employee will pay a modest AMT, but could hold the shares long enough to sell them at long-term capital gains rate, ending up paying a much more favorable tax rate than if they had been taxed as ordinary income.

The problem that occurred this year has been well publicized and has even penetrated the awareness of our elected representatives. House Democrat Zoe Lofgren, who represents part of the Silicon Valley, introduced a bill, along with 13 other Democrats, to exclude incentive stock-option plans from the AMT. The bill would be retroactive to Jan. 1, 2000, and is now awaiting action in committee. A group of high-tech professionals, including some from Cisco, have organized to help lobby for the passage of this bill.

While Congressional relief could help some people, the crux of the problem has more to do with awareness than with the tax code, according to Brumberg.

“A lot of people out there, aren’t very savvy about their options and how to handle them,” he says. “Sometimes the AMT can be very beneficial to people.”

While it’s too late to make changes on this year’s return, Brumberg offers these hints to help prevent problems in the future.

Know which kind of options you have: Independent contractors or outside directors can only be given nonqualified options by law. But employees of the company are often given a mix of incentive and nonqualified options. To figure out which ones you have, look at your grant document.

Exercise options early in the year: People who plan to hold onto options instead of selling them right away, should exercise those options earlier in the year rather than later. This gives them more flexibilty to plan for the future.

Develop a financial plan: Options should be viewed as an integral part of your compensation, says Brumberg. This means that people should plan what they want to do with the money and work towards optimizing their gains. This is money that could be used to, say, buy a house or finance an education. “You shouldn’t think of this as found money,” he says. “That can be an expensive use of the options.”

Be aware of key dates: Key dates like the end of a vesting period or the end of the options period are important to note. For example, people who often change companies have a shortened exercise period. Usually they must exercise their options when they leave or 90 days after they are gone.

For more information on options, check out Brumberg’s site, www.MyStockOptions.com.

-- Marguerite Reardon, senior editor, Light Reading http://www.lightreading.com