I have some stock options and I’m trying to figure out the best plan of action in exercising.
Do you know what type of options you have (i.e. Non-Qualified Stock Options “NQSO” or Incentive Stock Options “ISO”)? Your strategy depends on quite a few factors, but perhaps the below information can get you started.
The general rules for NQSOs is to sell them upon exercise as you’ll be paying taxes at ordinary income rates anyway on the fair market value over the exercise price. There’s also a mandatory 25% withholding tax and you’ll have to pay payroll taxes. If you don’t need all of the money now, it may make sense to stagger your exercise activity to ensure that you don’t move into a higher tax bracket.
For ISOs, which are generally more tax-friendly, there are instances in which you may want to hold the shares for more than a year as the long-term tax rate is more favorable. Unlike NQSOs, when ISOs are exercised it doesn’t result in a taxable event. Rather, there might possibly be just an alternative minimum tax consideration.
The last point to note is that you should not let the tax tail wag the investment dog. Taxes are just one factor to consider when evaluating if you should exercise your stocks options.
Are you considering exercising stock options? If so, we can perform an analysis for you to see if it makes sense. Contact us here.
IRC Section 422, 26 CFR 1.83-7