If you have ISOs (incentive stock options) or NQSOs (non-qualified stock options) are part of your job, there are a lot of choices and strategies to get the most value out of those.
I always say that tax planning isn’t about paying the least amount of tax [in a single year]. It’s about maximizing your after-tax income & cash flow over your lifetime.
The biggest perk of options is getting to exercise (buy) the stock at a discounted price as a benefit of your employment. We call that the “bargain element.” But you need to be aware of the tax consequences of your options.
ISOs and NQSOs have VERY different rules. Let’s look at a few of them:
ISOs are only available to employees of a company. NQSOs are more flexible and available to employees, contractors and even directors of a company.
ISOs have no *regular tax* impact upon exercise. They might have a *minimum tax* impact. For NQSOs, that bargain element is taxed as ordinary income when you exercise your options. The amount you get pay and get taxed on becomes your basis, aka your “skin in the game.”
When you later sell your options, you will (hopefully) have capital gains because the stock appreciated in value. Never wish not to have income/gains just because of the taxes. The stock value could go down and you could be left with a capital loss.
That capital gain or loss is the ultimate sale price minus your basis. For ISOs, you need to do a gain/loss calculation under both the regular tax and minimum tax method–those will usually be different. For NQSOs, everything is handled in the regular tax method.
This is exactly the kind of thing we love to help our clients with. If you are interested in setting up a tax planning session, especially before year-end, please contact us.