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Check to see if your company allows early exercising early as in within 30 days of the grant. If available, you have the option to exercise your shares within the first 30 days of the grant and file an 83 b election that would allow you to pay ordinary income taxes on your shares on the day of exercise. Exercise in January. Another way to minimize AMT impact is to exercise your shares you plan to hold early in the year. Run a multi-year projection.
We recommend taking a long view on this decision. By calculating your AMT for the next few years, you can time your elections to optimize your tax rates, accelerating or delaying certain elections as needed. You can calculate your AMT using Form , using a tax software, or with the help of a tax professional or financial advisor. Consult with a financial advisor. The best time is to seek the advice of a professional before you take any action. Remember, not exercising your options, or missing the early exercise window by waiting, is also an action.
Your situation is uniquely yours, so the only way to figure out the optimal option is to take a look at it closely. A financial advisor can help you proactively plan for what to do with your shares. Get in touch today.
As a hematopathologist, Steven Kussick focuses on blood-related cancers such as lymphoma. The Treasury Department and the IRS announced that the federal tax filing deadline for individuals has been extended to May 17, Employers can reduce risk and streamline the operations of their retirement plan by sweeping small k accounts of former employees.
Please remember that past performance may not be indicative of future results. Moreover, you should not assume that any discussion or information contained on this blog serves as the receipt of, or as a substitute for, personalized investment advice from Brighton Jones LLC. Brighton Jones LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
Please remember that you should never communicate any personal or account information through social media and it is important to familiarize yourself with their respective privacy and security policies. Events Client Login Contact Menu. Exercising Incentive Stock Options? November 16, Share on facebook. Create and review reminders to give yourself enough time to work with your advisors to effectively manage your held stock and other equity compensation.
Proper planning with your tax advisor will help avoid surprises in April and assist with cash-flow planning to meet your income tax obligations. Third, January can be an excellent time to exercise vested "in the money" incentive stock options ISOs. An exercise in January gives you the ability to time and control your alternative minimum tax liability. The sale of these exercised ISO shares in the same year results in a disqualifying disposition, which removes the threat of the AMT.
On the flip side, if the sale occurs in the following year, you can qualify for favorable capital gains rates.
The final action item is to review your entire financial holdings against the backdrop of your company stock and equity compensation. Be very careful of concentration risk.
The goal of every prudent investor should be balance and consistency in the investment process. Year-end planning for company stock holdings or stock unit exposure should continue to focus on traditional tax-planning and asset-diversification concepts. Individual planning priorities may be based on your position at the company key executive, salaried employee, consultant or director and the amount of compensation payable in stock.
With more long-term incentive LTI awards that become payable only if performance metrics are earned, you may be less able to control the timing of equity-based compensation than in the past.
Here are some issues to consider. Review stock option exercise strategy. If you hold "in the money" stock options that are scheduled to expire in the near future, e. For NQSOs, the manner of exercise cash, stock swap, or cashless should be reviewed, along with how required tax withholding will be paid in shares or in cash. For incentive stock options, the manner and timing of exercise should be considered, along with alternative minimum tax AMT considerations.
Uncertainty about future tax rates , including possible increases in the highest federal and state tax brackets and in the highest capital gains rate, could be a reason to review and consider an exercise of NQSOs and a sale of company stock or ISO shares. It could also mean that deferral of RSUs or PSUs, if available to you, needs to be thought through see next paragraph.
The stock market has been wobbly and could continue to be next year. Deferral of RSUs or other stock-based compensation. This could be a tax-savings planning tool, it but comes with some risk. If your employer allows you to defer RSUs, performance share units PSUs , or other stock-denominated compensation, you should review the timing and procedure for making a valid deferral election. Under IRC Section A, this procedure may be part of, or separate from, the company's election window for the deferral of salary and bonuses—which typically is in the 4th quarter. You should also review whether any deferrals must remain denominated in company stock units, which is common due to the more favorable accounting treatment to the company, or whether you have a choice in the crediting rate for any amounts deferred.
You also may have an opportunity to decide the timing of distributions for current-year deferrals. Given the Covid situation and the possibility of job termination , it is appropriate to review what happens to your stock compensation in the event of both involuntary and voluntary termination of employment. This is also an appropriate time to review all beneficiary designations.
Many companies are now limiting or prohibiting elective deferrals into a company stock account. If company stock is an available investment option in your k plan, year-end can be a good time to review your overall asset allocation and risk strategy. If your company matches your contributions in company stock, you should have an opportunity to move that match into other investments available under the plan.
This should be reviewed. If your company offers a broad-based employee stock purchase plan, review the amount of any purchase price discount and when offering periods commence. If you don't receive stock-based compensation, an ESPP can be your opportunity to acquire stock, often at a discount, through convenient payroll deductions. January 1 is the time to exercise incentive stock options ISOs.
Incentive stock options are thought of more favorably than nonqualified stock options because ISOs can create capital gains while NQSOs create ordinary income. When employees exercise ISOs, no immediate taxable income is created. When an ISO is exercised, a new capital gains holding period is established with the employee's cost basis being the price paid for the stock the exercise price of the option.
The ISO stock holding period begins on the day when the options are exercised. If the employee holds the stock more than 12 months from the exercise date and 24 months from the grant date and recognizes a gain upon the sale of the shares, the full gain is considered long-term. If the stock is held less than 12 months, part of the gain is considered compensation and is taxed as ordinary income see an FAQ with examples. ISO stockholders, therefore, have an incentive to hold shares at least 12 months.
But that creates a dilemma. Should ISO shareholders hold the stock and hope for more gains, or should they sell immediately after exercise? The costs of being wrong can be dramatic but not always obvious. If an employee decides to hold the shares, there is the alternative minimum tax AMT trap to consider.
In calculating the AMT, the difference between the purchase price option strike price and the market price is considered income. Importantly, the income is not AMT income if the shares are sold in the same calendar year as the option exercise.
This is many times confused with the month period necessary to qualify for long-term gains rates. Unfortunately, many employees have seen the price of their ISO stock drop during the year after exercise as they waited for their shares to go long-term. Without AMT liability, an ISO stock decline would damage the stockholder economically but not in terms of taxes—in fact, if the shares are sold below the exercise price, the employee could possibly realize a capital loss.
But if the ISO exercise has triggered an unforeseen AMT liability, the employee could owe significant taxes on worthless stock. Because of this, employees should exercise their ISOs at the very beginning of the year, giving them a full year to make a sell decision that would have no AMT impact.
If the stock falls, they should sell before December 31, which would trigger a short-term gain or loss but eliminate the AMT liability. At year-end, if the stock has risen, they could hold for a few more days into January for the month holding period to be achieved and then sell for a long-term gain. This approach could trigger the AMT, but the economic gain should outweigh the tax liability. By contrast, if an ISO is exercised in October, the employee has only a short time before the end of the year to decide whether to sell before December 31 and avoid the AMT or hold for nine months more in order to qualify for long-term treatment.
Incentive stock options have proved a wonderful device for motivating employees, but they must be managed carefully. The takeaway: exercise in January for maximum flexibility, and remember to observe the value of the shares that are purchased before year-end—or expect the possibility of an AMT bill in the following April. The advisors who submitted written remarks for this article did not pay myStockOptions.
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