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Tax Planning


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?

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 minimum taxable income. Alternative minimum 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 minimum 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 exercise of stock options.

What's the difference between Incentive Stock Options (ISOs) and non-qualified stock options?

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).

I am considering accepting a new position in California. What will the tax consequences be?

California recently passed Proposition 30 which raised tax rates retroactively to January 1, 2012 on taxable incomes above certain thresholds depending on filing status. 

California now has the highest income tax rates in the United States. California also has relatively high real estate prices (which leads to some of America's highest mortgage interest deductions). In order to assess 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.

What approach is used in planning for multiple years at the same time?

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 to sell stock next year. If you do sell stock, and pay tax, how will that affect your AMT in the following year? An example of a multi-year tax projection can be found by clicking here.

Tax planning is important as a part of your overall financial planning picture. We work with attorneys, CFPs, and other financial and investment advisors to guide our clients. In this economy, we can assist you to protect you and your family's future.