Add to that increased capital gains rates and the new 3. At the same time, some companies are turning to stock options and restricted stock units RSUs as a way of compensating and incentivizing their employees.
State and local taxes will, of course, also play a role in your tax strategy. Most methods of reducing your tax exposure involve reducing how much of your stock income is subject to ordinary income tax and making it subject to the long-term capital gains treatment instead—a potential tax improvement of nearly 20 percent. Almost all stock option grants come with vesting restrictions—an amount of time that must elapse before you can take ownership of the stock.
Any spread between your exercise price and the value of the common stock will become taxable income at the time you file your election. As you know, each year you pay the greater of your AMT or your ordinary tax rate.
Not holding your ISOs long enough can trigger a disqualifying disposition that makes your gains taxable as ordinary income—but you can use this feature to your advantage. When you exercise an option, then sell it later in the year triggering the disqualifying disposition , your income is computed by measuring the spread on the day of exercise; then a short-term capital gain or loss is incurred in the same year.
If your ISO is for a publicly traded stock, exercise early in the year and wait to see whether the stock price goes up or down by the end of the year. This triggers the disqualifying disposition and frees you from paying AMT on the spread when you exercised which would be higher than the present spread. If the stock goes up, you continue to hold it, aiming for the long-term capital gains treatment.
To illustrate, say you exercise a portion of your ISOs on January 5. The income from their vesting is reported on your pay stub, and the associated income and payroll taxes are automatically withheld. That part of RSUs is out of your control—but you can still reduce your overall tax bill with a little planning. In years when large blocks of RSUs vest, your ordinary income tax will usually exceed your AMT due to the additional ordinary income.
Whether these strategies will be effective ways to reduce the tax impact of your stock options or RSUs will depend largely on your particular compensation package and your personal tax situation. To learn if one of these strategies or others may work for you and for help applying it effectively, contact your Moss Adams tax professional.
He helps business owners, executives and families with stock option planning, income tax planning, estate planning, and charitable giving. You can reach him at or toby. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship.
Although these materials have been prepared by professionals, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented.
Types of Stock and Associated Taxes In general, there are four federal taxes that impact employee stock grants: The rate can range from 10 to Capital gains tax is charged on the sale of capital assets—that is, stock held in private or public companies.
If you hold the stock for longer than a year, the sale will be subject to the preferential long-term capital gains treatment—20 percent at the top tax bracket. Alternative minimum tax AMT is calculated starting with a series of modifications to your taxable income—including adding back deductions such as for state tax and incorporating spread income from the exercise of incentive stock options ISOs. See our earlier Insight for more on this tax. Common types of employee stock grants include: Make the 83 b Election for Early Exercise Almost all stock option grants come with vesting restrictions—an amount of time that must elapse before you can take ownership of the stock.
Exercise ISOs Early in the Year Not holding your ISOs long enough can trigger a disqualifying disposition that makes your gains taxable as ordinary income—but you can use this feature to your advantage. We're Here to Help Whether these strategies will be effective ways to reduce the tax impact of your stock options or RSUs will depend largely on your particular compensation package and your personal tax situation.
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