See how Wealthfront can help you reach your financial goals. While the list below is definitely not comprehensive, it does cover some impactful strategies. Remember that — based on the various types of taxes described in Part 1 of this series — through good tax planning, you may be able to achieve a This improvement represents the difference between the federal ordinary income tax at If you have incentive stock options at an early-stage start-up and the current stock price is equal to your option exercise price, then the only downside to buying your options is potentially losing your exercise cost.
If the company is very early stage and you can afford to take the risk that is, it represents a small percent of your liquid net worth , or if the price is cheap pennies per share , then why not get the capital gains clock started now, so that all the future appreciation can be taxed at long-term rates?
Almost all stock option grants have vesting restrictions. As a result the future appreciation even that which occurs before vesting will all be subject to the capital gains rules and potentially the preferential long-term capital gains tax rates. Note that you must file the 83 b election form within 30 days of purchasing your unvested options to execute this strategy. Any spread between your exercise price and the value of the underlying common stock at time of grant will become taxable income to you at the time you file the 83 b election.
You cannot file an 83 b or use this strategy to improve the tax consequences of your RSUs. As discussed in Part 1 of this series, each year you pay the higher of your regular tax and AMT. This is the approximate number of ISOs she can exercise to get to the crossover point.
Many times the optimal strategy is to exercise ISOs up to the AMT crossover as described above and then exercise no more for that year. But what if you already find yourself in AMT? In that case you may consider doing a same-day sale strategy assuming your stock is freely tradable to increase ordinary income such that your regular tax then exceeds your AMT.
You can also use nonqualified stock options NQSOs to generate the additional ordinary income needed to execute this strategy. There are a few different ways she can proceed with this situation in mind. One way might be to take some risk off the table by selling some of the shares that came from the ISO exercise earlier in the year.
This will trigger ordinary income and short-term capital gains, which will gradually pull her out of the AMT if these shares trigger enough. She can accomplish the same thing if she has NQSOs she can also exercise or if she has a spouse that could exercise his. In Part 2 of this series, we explained the hazards of not holding your ISOs long enough.
When you fail to hold shares you received from an ISO exercise for at least two years from the date of grant and one year from the date of exercise, you trigger a disqualifying disposition , which is taxed as ordinary income. When the exercise and the sale triggering the disqualifying disposition occur in the same tax year, you have ordinary income.
That income is computed by measuring the spread on the day of exercise; then a short-term capital gain or loss is incurred if the sale occurs later in the year. Given the repercussions above, one strategy with a publicly traded stock is to exercise your ISO early in the year and then wait until the end of the year to see if the stock price has gone up or down. If it goes up, you continue to hold for long-term gains treatment. So the strategy here would be to sell the stock before the end of the year to trigger a disqualifying disposition.
In many cases your regular income tax will exceed AMT because of the large ordinary income hit during a year when significant blocks of RSUs vest. In this case waiting to pay your state tax until you file your return or waiting to pay the second voucher on your property taxes can cost you big time. Conversely, if she waits to pay until April of the next year, she may be in AMT and receive no benefit at all. The examples shared have been simplified and based on your specific facts regarding your compensation and other items reported on your tax return the analysis can become complex.
It can be well worth your time to explore how to apply these strategies to your own situation, and you should seek professional help when necessary to execute them properly. Please feel free to contact us with additional questions—they often provide the genesis for additional posts. The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Moss Adams LLP.
This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship.
Although these materials have been prepared by professionals, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Moss Adams LLP assumes no obligation to provide notifications of changes in tax laws or other factors that could affect the information provided.
Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Explore our Help Center or email knowledgecenter wealthfront.
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