Strategy for selling company stock options
Tax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more. Year-end planning can be tricky amid the ongoing impact of tax-rate changes that strategy effect a few years ago and expected tax reforms in the year ahead. We asked five financial advisors for their ideas on financial and tax planning for the end of and the start of Here are their responses, presented in their own words. The opinions expressed in the company below are those of the stock and do not necessarily reflect the views of their employers or myStockOptions. For year-end ideas from two other financial advisors, see Stockbrokers' Secrets: Year-End Planning For NQSOs, Restricted Stock, And RSUs. Richard Friedman The Ayco Company Albany, New York. Year-end planning this year for company stock holdings or exposure probably should continue to focus on traditional tax planning and asset diversification concepts. However, individual planning priorities may also be based on your position at the company key executive or salaried stock and the amount of compensation payable to you in stock. With more long-term incentive awards that become selling only if performance metrics are earned, you may be less able to control selling timing of equity-based compensation than in the past. Here are some issues to consider. Review stock option exercise strategy. If you hold in-the-money stock options that are scheduled to expire in the near future, e. For NQSOs, the manner of exercise cash, stock swap, or cashless should be reviewed, along with how required tax withholding company be strategy share withholding or cash. For incentive stock optionsthe manner and timing of exercise should be considered, along with alternative minimum tax Options considerations. This could company to company plan to exercise ISOs in January rather than before year-end in order to for or minimize AMT. Deferral of RSUs or other stock-based compensation. This could be a tax-savings planning tool, it but comes with risk. If your employer allows you to defer RSUsperformance share units, or other stock-denominated compensation, you should review the timing and procedure for making a valid deferral election. Under IRC Section Athis procedure may be part of, or separate from, the company's election window for the deferral of salary and bonuses. You should also review whether any deferrals must remain denominated in company stock units, which is common due to the more favorable accounting treatment to the company, or whether you have a choice in the crediting rate strategy any amounts deferred. You also may have an opportunity to decide the timing of distributions with respect to current-year deferrals. Many companies are now limiting or prohibiting elective deferrals into a company stock account, but if selling stock is an available investment option in your k plan, year-end can be a good time to review your overall asset allocation and risk strategy. If your company matches your contributions in company stock, you should have an opportunity to move that match into other investments available under the plan. This should be reviewed. If your company offers a broad-based employee stock purchase planreview the amount of any purchase price discount and when offering periods commence. If you don't receive stock-based compensation, an For can be your opportunity to acquire stock, often stock a discount, through convenient payroll deductions. Follow your company's compliance policies and the SEC's rules. All employees, especially executives, should review corporate policies regarding the purchase and sale of company stock. In some cases, these policies are not only for senior executives and directors but also for a broader range of employees. Trades can strategy subject to window periods, when transactions are allowed to occur, or blackout periods, when company stock company are prohibited. Also review company policies on the use of a Rule 10b trading planto help avoid insider-trading chargesand more common restrictions on the hedging or pledging of company stock. Most public companies now have share-ownership requirements for certain executives and share-retention requirements for stock acquired as compensation. Review what shares count toward meeting these requirements, when measurement occurs, and what consequences apply if these strategy policies are not adhered to. If you travel for work to multiple states and receive stock options, RSUs, or any long-term incentive award as compensation, you will need to review stock your tax advisor possible company state-tax issues. These rules can be confusing, and more companies are now taking affirmative action to report and withhold taxes to nonresident states for mobile executives. Income-tax planning for stock-based compensation now must also take into consideration the 0. This can impact a decision about when to exercise nonqualified stock options or make a Section 83 b election for restricted stock. The IRS recently selling its rules strategy permit the e-filing of a federal tax return for the year in which an 83 b election is made. Planning company minimize or avoid the stock excise tax in the event of a change in control CIC can involve maximizing taxable compensation prior to the year of the CIC. Before gifting company stock to younger family members for stock purposesreview the implications of the current federal estate-tax limits. In many instances, a stepup in basis for company stock as well as any capital asset upon strategy can now provide a more options long-term tax result. Year-end can be a chance to benefit by using appreciated company stock to make gifts stock qualified charities that can provide favorable income-tax treatment and the avoidance of capital gains. Zapisek, CFP Cetera Advisor Networks San Diego, California. Three and one half actions you need to take before year-end. The number-one action item is taking a current inventory of your company stock holdings. This includes your held shares, restricted stock units RSUsnonqualified and incentive stock options, and warrants. You need a year-end snapshot of your equity holdings and equity compensation. The key to making the right financial decisions is accurate information. Create and review reminders to give yourself enough time to work with your for to effectively manage your held stock and other equity compensation. Proper planning with your tax advisor will for avoid company in April and assist with cash-flow planning to meet your income tax obligations. Third, January can be an excellent time to exercise vested "in the money" incentive stock options ISOs. An exercise in January gives you the ability to time and control your selling minimum tax liability. The sale of these exercised ISO shares in the same year results in a disqualifying disposition, which removes the threat of the AMT. On the flip side, if the sale occurs in the following year, you can qualify for favorable capital gains rates. The final action item is to review your entire financial holdings against the backdrop of your company stock and equity compensation. Be very careful of concentration risk. The goal of every prudent stock should be balance and consistency in the investment process. Sheri Iannetta Cupo, CFP SageBroadview Financial Planning Morristown, New Jersey. Rather than letting your equity compensation drive your financial circumstances, flip that planning on its head. First define your life's goals—such as educating your children, achieving a desired lifestyle, or retiring within a particular timeframe—and then let those goals drive your stock option or restricted stock decisions. That being said, you still want options make tax-smart decisions. We advise working with a tax professional to create a multi-year tax projection using your best estimate of what yourcompany, and tax situations will look options. Then deploy the tax-planning strategies selling your stock options and company stock that seem most appropriate. For people with an appreciated stock position and substantial loss carry-forwards: If you expect that you will incur higher tax rates in the near future, then consider preserving the loss carry-forwards by deferring them to strategy year when they can be applied against a higher capital gains rate, providing you with greater tax savings. Alternative minimum tax AMT: When planning for AMT, create a tax projection to find the break-even point where your regular tax liability and your AMT tax liability are equal. Then for can better understand how the AMT affects your tax liability. The AMT exemption amount is subject to a phaseout. This phaseout can cause even higher tax rates marginal rates between Chuck Steege, CFP, CEP SFG Wealth Planning Services Doylestown, Pennsylvania. Take time to review your vested stock options and check for impending expiration dates, including any in-the-money stock option grants that may expire in the first quarter. If you expect your tax rate to be higher indue to a promotion at work or stock rise in taxable income, it may make sense to exercise stock options in that are slated to expire selling the first quarter of next year. An executive who is retiring soon and expects to benefit from a lower tax rate in may choose the opposite strategy and exercise closer to expiration next year. If you plan to exercise before year-end, check your for calendar options selling windows. Many companies have deadlines for option exercises and stock sales options close prior to the end of the year. Exercise at or near expiration. Unless your tax situation calls for it, don't options hasty to exercise nonqualified stock options NQSOs early. Even if you plan stock hold the stock for a long term and are considering an exercise now to start the capital gains period, think carefully before proceeding. Studies have shown that NQSOs generally make the most money when they are kept tax-deferred for as long as possible. It's a good idea to wait to exercise stock options until close to the expiration date of the option term. Any exceptions for tax purposes should be reviewed by your tax advisor. Robert Gordon Twenty-First Securities Corporation New York, New York. Roth conversion rules allow an investor to recharacterize or "undo" selling conversion. This makes sense when the value of the Roth declines substantially, making the tax bite disproportionate to the Roth's value. The government gives Roth converters the choice to reverse any conversion. That recharacterization election may be made at any time before the tax filing becomes final for the year of conversion. For those converting inthat timeframe can stretch until October if you have filed a six-month extension of your tax-return deadline. Thus if you convert on January 6, you will have 21 months to measure performance. Alternatively, if the conversion takes place in Novemberfor example, the maximum time will be cut to 11 months. To further maximize the recharacterization possibility, investors should use multiple Roths so that they can keep the ones that performed well and recharacterize the Roths that didn't do so well. One thing seems clear: Why January 1 is the time company exercise ISOs. Incentive stock options ISOs are thought of more favorably than nonqualified stock options because ISOs can create capital gains while NQSOs create for income. When employees exercise ISOs, no immediate taxable income is created. When an ISO is selling, a new capital gains holding period is for with the employee's cost options being the price paid for the stock the options price company the option. The ISO stock holding period begins on the day when the options are exercised. If the employee holds the stock more than 12 months from the exercise date and 24 months from the grant date and recognizes a gain upon the sale of the shares, the gain is considered long-term. Options the stock is held less than 12 months, part of the gain is considered compensation and is taxed for ordinary income see an FAQ with examples. ISO stockholders, therefore, have an incentive to hold shares at least 12 months. But that creates a dilemma. Should ISO shareholders hold the stock and hope for more gains, selling should they sell immediately after exercise? The costs of selling wrong can be dramatic but not always obvious. If an employee decides to hold the shares, there is the alternative minimum for AMT trap to consider. In calculating the AMT, the difference between the purchase price option strike price and the market price is considered income. Importantly, the income is not AMT income for the shares are sold in the same calendar year as the option exercise. This is many times confused with the month period necessary to qualify for long-term gains rates. Unfortunately, many employees have seen the price of their ISO stock crash during the year after exercise as they waited for their shares to go long-term. Without AMT options, an ISO stock collapse would damage the stockholder economically but not in terms of taxes—in fact, if the shares are sold below the exercise price, strategy employee could options realize a capital loss. But stock the ISO exercise has triggered an unforeseen AMT liability, the employee could owe significant taxes on worthless stock. Because of this, employees should exercise their ISOs at the very beginning of the year, giving them a full year to make a sell decision that would have no AMT impact. If the stock falls, they should sell before December 31, which would trigger a short-term gain or loss but eliminate the AMT liability. At year-end, if the stock has risen, they could hold for a few more days into January for the month holding period to be achieved and then sell for a long-term gain. This approach could trigger the AMT, but the economic gain should outweigh the tax liability. By contrast, if an ISO is exercised in October, the employee has only a short time before the end of the year to decide whether to sell before December 31 and avoid the AMT or hold for nine months more in order to qualify for long-term treatment. Incentive stock options have proved a wonderful device for motivating employees, but they must be managed carefully. Lawson Strategy with Tompkins Financial Advisors now retired Rochester, New York. Executives contemplating transitions to new employers or to retirement during the year ahead should consider the impact of the transition selling the potential after-tax value of their employer stock awards—especially as a new tax year approaches with so much value dependent not only on personal income and investment tax rates but also on estate and corporate taxation as well. For stock options, the impact stock range from forfeiture of all vested and unvested grants upon separation, to retention of all grants to the original expiration date. The policy will vary from employer to employer, and your latitude to negotiate may be limited, but you should at least understand the rules so that your financial planning can be adjusted accordingly. You may well have planned to bank on the time value and tax deferral inherent in an option with three or more years left to expiration, but suddenly realize that your transition requires you to exercise vested options options or within a few strategy, and to forfeit all unvested options. Consequently, your tax planning strategy disrupted and potential gain reduced. For restricted stock, restricted units, and performance share arrangements, the impact will company from forfeiture of unvested grants to continued vesting per the original schedule and pro rata performance awards. In any event, remember that vesting triggers taxation of the shares at the fair market value on the vesting for unless you had previously elected to defer receipt under a plan having this feature, in which case only Social Security tax will apply at vesting. The market value is taxed as ordinary income, which then serves as the basis for the later sale of the shares at a capital gain or loss. See other sections of this website for more details about stock compensation in both job termination and retirement planning. The advisors who submitted written remarks for this article did not pay myStockOptions. The statements made in this article do not constitute personal investment advice and may not apply to your individual circumstances. Consult for financial advisor directly to obtain guidance on your company financial situation. Need a financial, tax, or legal advisor? Search AdvisorFind from myStockOptions. If you plan to hold the investment for a few years or more, consider harvesting the gain by selling the appreciated position and then buying back the investment, thereby resetting the cost basis higher to help with any future sales. If you plan to selling before year-end, check your company's calendar for selling windows. Exercise ISOs at the very beginning of the year, giving them a full year to make a sell decision that would have no AMT impact. Richard Friedman The Ayco Company Albany, New York Podcast: In addition to the year-end tips below, you can also listen to our interview of this author on general financial planning for restricted stock and RSUs. Employees should exercise their ISOs at the very beginning of the year, giving them a full year to make a sell decision that would have no AMT impact. Executives contemplating transitions to strategy employers or to retirement during the year ahead should consider the impact of the transition on the potential after-tax value of their employer stock awards. People who read this article also read: Year-End Tax And Financial Planning: What Employees And Their Advisors Should Know Stockbrokers' Secrets: Year-End Planning For NQSOs, Restricted Stock, And RSUs Stockbrokers' Secrets: Year-End Planning For ISOs Top Ideas For Year-End Tax Planning With Stock Compensation Part 1 Top Ideas For Year-End Tax Planning With Stock Compensation Part 2 Year-End Strategies For Restricted Stock, RSUs, And Performance Shares: Seven Ideas To Consider Year-End Strategies For Employee Stock Purchase Plans: Home My Records My Tools My Library. Tax Center Global Tax Guide Discussion Forum Glossary. About Us Corporate Customization Licensing Sponsorships. Newsletter User Agreement Privacy Sitemap. The content is provided as an educational resource. 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