Employer stock options remain a potentially valuable asset for recipient employees, especially when they work for startups or growing enterprises.
For example, many Silicon Valley millionaires got rich (or at least semi-rich) from exercising their employer stock options.
Complicated tax rules apply to folks who exercise company stock options. And when the market goes south, you can wind up owing income tax on paper gains that have literally vanished.
This analysis summarizes what you need to know about the federal income and employment tax rules for employer-issued non-qualified stock options.
Employer Stock Option Tax Planning Objectives
You will eventually sell shares you acquire by exercising employer stock options, hopefully for a healthy profit. Your two tax planning objectives are to
have most or all of that profit taxed at lower long-term capital gain rates, and
postpone paying taxes for as long as possible.
Key point. The two tax planning objectives cannot be allowed to override the more fundamental financial planning objective of making as much money as possible on the deal without taking excessive risks.
Know the Two Types of Employer Stock Options
Employer stock options come in two basic flavors.
Flavor No. 1: Incentive Stock Options
Incentive stock options are also sometimes called qualified options or statutory options. They are entitled to preferential federal income tax treatment. But incentive stock options are also subject to some special restrictions and ... Log in to view full article.