TAX PLANNING:
Incentive Stock Options and other issues
Q.My
employer granted me incentive stock options as part of my compensation
package. I was considering exercising some of my options this year. So
what are the tax implications?
A. When you are granted Incentive Stock Options (ISOs), there
is no tax effect for you. When you exercise the options there is no addition
to your regular taxable income. HOWEVER (the big caveat), there is
an addition to your alternative taxable income. Alternative taxable income
is a separate income tax calculation that includes certain items that the
regular income tax calculation does not include. One of those items
which is included in alternative taxable income and not in regular
taxable income is the difference between the market price of stock and
the option price of stock on the day the option is exercised. For example,
today you exercised 3,000 options which were granted to you through the
company's incentive stock option plan. The option price was $1.75 per share
(and so you wrote the company a check for $5,250). The market price today
was $31.75 per share. You have no additional taxable income for regular
tax
purposes. You DO however have $90,000 of additional taxable income for
alternative minimum tax purposes. If you are considering exercising incentive
stock options, it is probably wise to undertake some measure of tax planning
in order to gauge the effect of the alternative minimum tax on your overall
tax picture. Also be aware of the timing rules related to sale of stock
acquired through the excercise of stock options.
Q.What's
the difference between Incentive Stock Options (ISOs) and non-qualified
stock options?
A. The primary difference relates to taxation at the date of
exercise. Whereas Incentive Stock Options are not subject to regular income
tax when exercised, non-qualified stock options are. Note that regular
income tax is mentioned. When exercising Incentive Stock Options, attention
should be paid to the Alternative Minimum Tax (AMT).
Q.I
am considering accepting a new position in California. What will the tax
consequences be?
A. California does have relatively high individual income tax
rates (9.3% at the highest). California also has relatively high real estate
prices (which leads to some of America's highest mortgage interest deductions).
In order to evaluate the effect of these variables on your financial picture,
and whether your new compensation package is adequate, a three to five
year tax planning projection compared against your current situation can
often be quite valuable. In fact, it may be possible to show, from
an after-tax, cash flow perspective, how a higher salary will be required
from a prospective employer before a decision is made.
Q.What
approach is used in planning for multiple years at the same time?
A. Tax planning software that handles multiple years simultaneously
is used. For example, your decision to sell stock in one year may affect
your April 15 tax liability in the next year. That upcoming tax liability
may cause you to have sell stock next year. If you do sell stock, and pay
tax, how will that affect your AMT in the following year?
