What to Know Before Exercising Stock Options


Companies are still trying to attract talented workers by offering the company's stock options at a reduced price, which the employee can then sell (hopefully) at a higher price, or as a simple "advantage". to be used. Understanding the difference is key to reducing your tax burden. UNATTRIBED and INCENTIVE SHARE PURCHASE OPTIONS ("qualified" stock options) are the two most common types of purchase options. of actions that employers organize for their employees.

Generally, you pay no tax when unskilled options are granted. You must pay ordinary income tax on the difference, or "difference", between the price of the subsidy (the price at which the company sold you the stock) and the current market value of the security (set at the close of business). the exchange on the day of the sale). when you buy ("exercise") the shares. Companies deduct the "spread" as a compensation expense. Unqualified options may be granted at a price lower than the market value of the share. They are also "transferable" to children and charities, provided your business allows it.

Incentive purchase options (called "qualified" purchase options) are eligible for special tax treatment. Your income tax is deferred until you sell the stock. Thus, no income tax is due at the time the options are granted or exercised.

At this point, the full gain of the option (the initial spread to the fiscal year plus any subsequent appreciation) is taxed at long-term capital gains rates, provided that you sell at least two years after granting the option and at least one year after your exercise. If you do not meet the conditions of the retention period, the sale is considered a "disqualifying disposition" and you are taxed as if you had held ineligible options. The gap at the time of exercise is taxed as ordinary income and only the subsequent appreciation is taxed as a capital gain.

Unlike unqualified options, incentive purchase options can not be granted at a price below the market value of the stock and they are not transferable except by a distribution made by will or trust following the death of the stock option holder. . IRS caps the annual amount of incentive stock options exercised during a year at $ 100,000. The gap at the time of exercise is considered an "element of preference" for the purpose of calculating the alternative minimum tax (AMT), increasing the taxable income for the purposes of the tax. AMT (bargaining element). A disqualifying decision can help avoid this tax.

Choosing the right time to exercise is not as easy as it seems. Excessive exercise of stock options can lead to real financial problems, particularly with respect to the payment of taxes on your profits. Even if you keep the stock you bought, you may have to pay taxes. Many employees are unaware of a strategy to exercise their stock options, which could generate heavy tax bills when April 15 is announced.

For many beneficiaries of stock options, employees will have to wait for the share price to rise to be able to use the "unexpected gain" during a big vacation or a major upgrade of their home. In the meantime, employees may lose control of the time of sale as their options expire and they are forced to sell before losing their value. Employees need a disciplined strategy when evaluating stock options in order to make the smartest financial decisions possible.

Here are 6 key questions to ask for a successful financial result.

Timing – When are the stock options acquired?

The usual vesting schedule is generally spread over four years, with a quarter of the shares becoming vested after each year. It is important to understand when you will actually acquire the shares. Once the shares are acquired, you can exercise and sell this part of the stock options.

Taxes – What is the projected overall tax bill?

By exercising and selling your options, you ensure that the shares are taxed at a high rate and that this will directly affect other sources of revenue, high tide raises all vessels. One of the best advice is to forecast the overall tax burden associated with the exercise and sale of options. Waiting one year before selling should allow you to choose the option of capital gains tax rates instead of ordinary tax rates. This decision carries risks because if, after the exercise, the stock price drops to a level where the stock options become worthless, the exercise can still be subject to the minimum tax alternative.

Asset Allocation – How much is too much?

The risk of "concentration" must be taken into account so that the success of a portfolio is not dependent on a fluctuating stock market price. It is important to have a disciplined financial plan that incorporates an exit strategy that will rebalance if a security appreciates above a certain percentage of the overall portfolio (eg 10%). Many retirement projects were removed during the "technology bubble" of the early 2000s and barely 8 years later.

Measuring stick – What are the quantitative, qualitative and technical attributes of society?

Many customers love the company they work for and who can blame them? By working here in Motor City, we are constantly assisting the leaders of the three major countries as well as suppliers to the automotive industry. They all have the same state of mind: their businesses have been very good with them. They managed to make a living, to send their children to school and to save for a nice retirement. They are right, but it is always wise to check the essential elements of any organization in any sector, especially when globalization becomes more and more global. It is much more mobile to investigate the fundamentals of a business. Simply understanding the average deviation of the company's title can help determine the trend and volatility to determine the overall risk that a single security can impose on the overall performance of a portfolio .

Cost Value in Dollars – Is There a Stock Purchase Plan?

Employees generally have access to an employee stock purchase plan. By understanding the acquired schedule and the available options, an employee can set target prices to exercise and sell their respective options.

DILUTE and BUY STOCK – What is the news of the company?

I'm not talking about insider trading, but keep an eye on the company's news regarding its stock, especially if they plan to release more shares in the market or whatever recent trends in share repurchase. This is the case where less is better, normally.

A trained and specialized third party professional in this field can greatly assist in developing a plan that will reduce costs, taxes, and risks while improving the overall efficiency of an option plan. purchase of shares.

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