Joe X (Real people and events but no real names used, of course) is an executive with a well-known national corporation. Joe thought this would be a great time to buy that summerhouse his family had always wanted, so he exercised his stock options in one year. Six months later at tax time, Joe discovered that exercising those stock options triggered an AMT (Alternative Minimum Tax) liability to the tune of $67,000. The only break Joe got in this whole thing is that he hadn’t bought the house yet so he had the cash available to give to the IRS….instead of buying the summer place.

Irene Y had an annuity she’d bought at the bank a few years back. The bank salesperson told her it had “expired” and she should sell it and buy mutual funds. Irene said okay. Come April 15 of the following year Irene found out that the tax liability on that particular piece of bank salesmanship would cost her a little over $20,000 in taxes. Since then her mutual fund had dropped by nearly 20%. Between that loss and the taxes due, Irene had less money than she started out with, nearly eight years ago. To add insult to injury her bank salesperson was now working at another branch and her replacement showed little interest in Irene’s plight since no new commissions would be forthcoming. In reality there was little they could have done at that point. It’s like applying the brakes after the collision.

Scott Z. got a phone call from his broker who said there were new rules for converting his traditional IRA to a Roth and his firm was offering a “special deal” for a limited time only. Scott went with the deal. Summer and Fall passed, New Year came along and before you know it Scott was getting a major piece of bad news from his accountant: $29,500 of income taxes due.

Bill ZZ was retiring this year and eying up a retirement condo in Florida. The condo was a great deal but the house in Miller Place would take a while to sell. Bill didn’t want a mortgage so he rolled over his IRA and subsequently cashed in half of it and bought the condo. It was a year later in mid-march, as warm breezes washed over the Gulf of Mexico and the sun beamed down on Bill’s retirement condo that he got the news that turned his stomach: $41,000 due the IRS and $12,000 for NY State. Bill wound up with a mortgage after all and the proceeds all went for taxes.

Joe, Irene, Scott and Bill, all had different problems but the results were the same. Joe found out that exercising stock options not only create income taxes, both state and federal at the highest rate, but also trigger an AMT liability on top of everything else.
Irene learned that annuities do not “expire.” The penalty period simply ends, prompting the bank salesperson to make another sale. The second thing that Irene learned is about the built-in taxable gains. Annuities are retirement vehicles, never meant to be bought and sold. Using them in this fashion is misusing a good tool, sort of like trying to bang in a nail with a saw. It won’t work, but it doesn’t mean the saw is not good.
Scott learned that no matter how great the deal from the brokerage was, the tax laws still make a Roth conversion fully taxable. Sure it’s easier now, and in certain cases it’s still a smart thing to do, but not always. In Scott’s case, it clearly wasn’t.
As for Bill, he ran up against the inevitable. Distributions from an IRA are always taxable. Sure the 10% penalty vanishes at age 591/2, but you’ve still got the tax brackets up to 28% federal and 7% New York State (After the 20% exemption – yeah, NY managed to give us a break there.) Problem was that after Bill added his and his wife’s W-2’s from his last year of work, and his severance, accumulated sick days and vacation time, his income was pretty high that year. Throw in a major distribution from his IRA and Bill is riding the locomotive on a tax-wreck.

Now you might wonder, that these are all different tax problems whose solutions are as different as hockey is from baseball. While this is true, it leads to the greatest tax tip ever:

Never make a financial move without understanding the tax ramifications.

Making such financial moves without knowing the tax impact is like walking blindfolded through a forest filled with traps. Sooner or later you’re going to get nailed. Here’s an easy two-step process to stay out of tax problems:

1. Before you make a financial move always consult with a knowledgeable tax advisor. Find out how much income taxes this will cost you at both state and federal (if you live in New York City or Yonkers, factor them in as well.) Explore alternative strategies. Joe could have stretched his stock options lowering his AMT liability. Irene could have just left her annuity alone, it wasn’t that bad, or perhaps taken smaller distributions over a number of years. Scott could have done the same with converting his IRA to a Roth and Bill should have taken out a mortgage and paid it with monthly distributions from his IRA thus stretching his tax liability and avoiding the higher brackets.

2. Be sure the tax advisor you consult understands the issues. Not all tax preparers can handle complex tax problems like stock options, annuity distributions, Roth conversions and many others. Your financial and tax advisors should have credentials like CPA, EA, or tax attorney. Titles like “Financial advisor” “Customer Services Representative” or “Account Executive” mean nothing and the tests they take to get licenses have precious little to do with tax laws. Even worse, don’t get your advice from your golf partners, club friend or “water cooler buddy” unless those well meaning folks are also CPA’s, EA’s or tax attorneys, then make an appointment and pay them for their time, it will be well worth it.

Patrick P. Astre, CFP, EA, RFC is a financial author, advisor, and Enrolled Agent representing taxpayers rights before the IRS. His office is on Rt 25A in Shoreham and he welcomes your questions and comments. You may reach him at his office 631-744-9100 or his website and subscribe to his newsletter through the website

Author's Bio: 

Patrick P. Astre, CFP, EA, RFC

Patrick P. Astre, CFP, EA, RFC is a recognized tax and financial expert specializing on the economic issues of longevity. Patrick is independent and has been advising individuals and corporations since 1969.

Patrick’s second financial book was released in mid-August 2008 by Entrepreneur Media Publishing. It is Entrepreneur’s “cornerstone” retirement book. This is Not Your Parents’ Retirement is all ready one of the top sellers in its field, addressing the convergence of the longevity revolution and the aging baby-boomers, woefully unprepared for retirement.

Patrick has been widely quoted in the national media and his financial articles have appeared in numerous national publications. In addition to his financial books, he is the author of numerous articles as well as fiction thrillers. His novel “The Last Operation” is currently being published by Echelon Press while another thriller, The Artifact won the Salvo Press Mystery Thriller of the year Award for 2004 and was released in July 2005. Blackstone audio has purchased the audio rights and it is now one of their new releases.

Patrick is a professional public speaker and member of the National Speakers Association. His seminars, speeches and keynotes are a lively, enthusiastic mix of entertainment, motivation, humor and unique insights. He uses energy and laughter on the stage, and elicits participation to delight his audiences.

Some of his clients include Celebrity Cruises, John Hancock, Princess Cruises, LIBOR (Long Island Board of Realtors) Passaic Board of Realtors, F & T Life, ING Direct, Emerald Passport International, and many others. He has shared the stage with the likes of Les Brown, Ed Forman, Ross Quinn, Captain Gerald Coffey, and many others. For more information on available programs, please visit his website at

Patrick lives in Long Island, New York with his wife Lynn. The couple has two children and two grandchildren.

Patrick P. Astre, CFP, EA, RFC Astre Planning Inc. Ridge, NY
Phone: 631-744-9100 Fax: 631-209-0066