Frequently Asked Questions

AMT can apply for various reasons, such as having certain business deductions or exercising and holding incentive stock options. However, just because you exercise and hold incentive stock options does not mean you will owe AMT. To calculate whether you owe AMT, you’ll need to complete Form 6251 on your tax return. Learn more

The AMT system is parallel to the regular income tax calculation and is calculated using IRS form 6251. The calculation leads to the tentative minimum tax. Generally speaking, if the calculation for TMT is more than for regular tax, the difference is the AMT.

The calculation includes certain income and deductions, but they’re not always the same as those for calculating your regular income tax. Most notably, the exercise and hold of incentive stock options is a preference item, and is included in figuring AMT.

The Alternative Minimum Tax can be a significant concern when exercising incentive stock options, particularly if you have large bargain element, and it’s important to understand how this might impact your overall strategy.

A large bargain element might lead to a big AMT, and you’ll want to consider how you will cover this tax.  You’ll also want to evaluate how and when you receive an AMT credit, as well as your concentration risk, and the potential stock performance.

Ultimately, every financial and tax situation is different. Ideally, you’ll want to run tax calculation or speak directly with an advisor before making a final decision on how best to manage your AMT concerns this year. Learn more

The most common scenario that impacts the AMT is an exercise and hold of ISOs. If you hold the shares past calendar year end, the bargain element (or the difference between the FMV at exercise and the strike price of the ISO, multiplied by the number of options exercised) is an adjustment on form 6251 when figuring the AMT. If the bargain element is enough to have the TMT exceed the regular tax, then AMT may be due.

The sale of shares acquired through an ISO exercise may also impact the AMT. For example, a qualified sale of ISOs might create a negative adjustment on form 6251, potentially leading to an AMT credit.

In a less direct way, a disqualified sale of ISOs generates taxable income. Your taxable income directly impacts the amount of room you have until you reach the AMT crossover point. If also could income AMT due and/or AMT credit, amongst other things.

When you exercise an employee stock option, you need to pay the strike price of the option to buy the stock. The exact cost to exercise equals the number of options you exercise multiplied by the strike price of the stock option.

You may be able to cover the cost several ways, including with cash, with other shares (known as a stock swap), or via methods like a share withholding, cashless exercise, or a sell to cover.
Ultimately the decision you make will be tied to personal financial planning goals and company plan rules and regulations.

There are two types of stock options– incentive stock options (ISOs) and non-qualified stock options (NQSOs). They have many similarities, including a strike price, a vesting schedule, and an expiration date.

NQSOs are generally considered simpler, primarily because of tax. When you exercise NQSO, the bargain element is taxed as ordinary income. ISOs are more complicated, particularly because of the AMT, the potential for long-term capital gains, and the holding period requirements of a qualified sale.

You can read more here. Learn more

It’s important to know what happens to your employee stock options upon terminating your relationship with your employer. The answer to what happens can get complicated. Depending on why your employment status changes from employee to a former employee and what type(s) of employee stock option(s) you have, the rules surrounding what you can and can’t do with your equity compensation will vary.

Often, we’ll see a 90 day post-termination exercise window on employee stock options. This means that your options will need to be exercised within this time or they will be forfeited. You’ll want to keep in mind, however, that if the expiration date of the option preceeds the 90 day post-termination window, that will be the date you’ll need to exercise by in order to capture the benefit.

90 days is not always the case, and the best strategy is to check your plan document for the specific rules regarding your plan. But in the meantime, here is a primer of things to know now. Learn more

If you participate in an ESPP, you’ll likely hear the terms qualifying disposition and disqualifying disposition. These terms speak to holding period requirements for your ESPP shares that impact how and when your sale proceeds will be taxed.

A qualifying disposition is a final sale of ESPP that meets the following two requirements:

1. The final sale of your shares occurs at least two years from the grant/offer date, AND
2. The final sale of your shares occurs at least one year from the purchase date.

Generally speaking, if you meet the qualifying standard and profit from the transaction, the discount from the purchase price received (if any) is taxed as ordinary income, and other proceeds are taxed as a long-term capital gain/loss. If you have a disqualified sale, you’ll generally pay ordinary income on profit.

ESPPs are notoriously complicated when it comes to tax, but you can learn more here.

ESPPs might allow you to contribute up to a maximum percentage of salary, like 10 to 15 percent. Some companies may also allow you to contribute a fixed amount. You can contribute at your chosen contribution rate until you reach the maximum allowable annual limit of $25,000 per year (for a qualified plan).

In either case, remember that contributions to a plan come from your paycheck — which means the more you contribute, the less take-home pay you have. Learn more

An ESPP is a convenient way to buy shares of your company stock, as contributions are often deducted pre-tax directly from payroll. In addition, ESPPs may allow you to buy stock at a discount from the FMV (up to 15%) and/or at a lower price based on a lookback provision (a lookback provision may allow you to purchase stock at the better of the purchase date price or the price on the grant date/offering date of the plan).

The combination of ease of funding and a potentially discounted purchase price make a good ESPP a valuable employee benefit

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Your plan document can tell you how your employee stock purchase plan works, but there are still details to dig into before you can understand if using your ESPP is the best choice for you.

In addition, you’ll want to consider your personal cash flow. Contributions to an ESPP will often be deducted from payroll. This results in less take home pay while your funding the plan.

You’ll also want to develop a strategy regarding when to sell the stock. Option 1 is to sell the stock immediately upon purchase, selling as a disqualifying sale and removing stock risk. Option 2 is to hold the stock until the shares reach qualified status and obtain preferential long term capital gains on some or most of the gain.

There is no taxable event when performance shares are granted. A taxable event occurs once you meet a performance metric and shares are delivered. This often occurs after the board meets to certify the attainment of said goal. At that time, the value of the delivered shares is taxed as ordinary income subject to Social Security and Medicare tax.

A performance award is generally issued with a target number of shares, an achievement timeline, its metric(s), and a minimum and maximum award. Minimum/maximum awards are typically based on how effectively you meet your metrics, such as whether you reach 0%, 50%, 100%, 150%, or 200% of your target within the designated timeline.

For example, a simple illustration may look like this:

• Target Shares: 5,000
• Timeline: 3 Years
• Performance Metric: Net Revenue
• Payout Thresholds
  • Minimum: 0% of Target
  • Target: 100%
  • Maximum: 200% of Target

There can be variations on every offer, so always read the fine print which is most likely to be found in your grant agreement and notice than in the stock plan itself.

Performance Stock Awards (PSAs or PSUs), are meant to reward executives based on their contributions to a company’s objectives and overall progress measurably and harmoniously. The more deliberately a company can structure its executives’ performance share metrics, the better it can align executive incentives with its particular values and vision. If the executives rise to the occasion, the business should thrive along with its share price, and everyone should win: shareholders, executives, the company, and its clients.

Thus, while typical RSUs and stock options can contribute to a company’s success, a well-designed PSA program can potentially drive success and efforts in a way other forms of equity cannot.

If your employer has granted you incentive stock options (ISOs), you’ve probably read about the alternative minimum tax (AMT) and qualifying and disqualifying dispositions. Perhaps the complication has left you wondering what this means for you as a taxpayer.

While AMT and holding periods for qualified sales may be important from a tax-reporting standpoint, they may be irrelevant if you simply exercise and sell your ISOs in a cashless transaction. Before you spend too much time studying the nuances, you might want to ground yourself on other key points regarding the tax treatment of ISOs. Learn more

Incentive stock options are a powerful compensation tool that can help you grow your wealth. Companies award them to employees as a retention vehicle, to reward specific successes or as an incentive when trying to attract new employees.

There are several advantages to incentive stock options, including:

• Incentive Stock Options have a simple process for exercising.
• You choose when to exercise your Incentive Stock Options.
• Incentive Stock Options offer the potential to participate in stock price appreciation.
• Incentive Stock Options are not subject to payroll taxes.
• Incentive Stock Options can qualify for long-term capital gains.
• You may get Alternative Minimum Tax Back as AMT credit.
• ISOs allow you to participate in the success of the company
• You can manage the cash flow required to cover the cost of the Alternative Minimum Tax.

Learn more

As a general rule, you will be subject to ordinary income tax on the bargain element when you exercise non-qualified options. This amount is often included in your w-2 at year end.

Paying the tax may happen one of sevearl ways. First, companies will often withhold a statutory tax due at exercise. This is generally 22% for federal income tax, plus requisite Social Security, Medicare, and State tax (if any).

This 22% may or may not be enough, subject to your total taxable income at year end. If it is not enough, you may owe additional tax due when you file your tax return. One way to avoid this is to perform tax planning throughout the year, and make estimated tax payments if necessary.

Some companies will offer an early exercise provision on their NQSOs. This allows you to exercise your NQSO prior to the shares vesting.

If allowed an early exercise, the 83(b) election of non-qualified stock options allows you to exercise and pay tax on your pre-vested NQSOs. When you exercise your NQSO, you’re taxed on the spread between the strike price of the NQSO and the FMV at exercise.

An early exercise and an 83(b) election is a tax planning strategy that is often considered for pre-IPO and low cost options. Assumin the cost of the options is small and the spread between the strike price and the FMV is small, the total cost (cash to buy plus potential tax due) is palatable. By exercising and holding early and filing the 83(b) election, you can begin the holding period, and attempt to convert what might be ordinary income to long-term capital gains.

NQSOs are not taxed when they are granted. An NQSO grant means your company gives you the right (or option) to buy a set number of stock shares at a set price for a period of time. When your NQSOs vest, there is once again no taxable event. A taxable event occurs when you exercise your NQSO. Only once you exercise your options do you become an actual company stock shareholder. At exercise, you’ll incur taxes at ordinary income tax rates on the value of the transaction.

The first determinant is whether the stock’s fair market value exceeds your strike price. If it doesn’t, there’s generally no point in exercising vested options; if you wanted to purchase any shares, you’d be better off buying them on the open market. Beyond that, it helps to have a strategy of deciding when it’s a good time to exercise your NQSOs. Having a strategy will help you decide whether to (i) wait until the options approach their expiration date, (ii) set a price at which you’ve achieved “enough,” (iii) set up an automatic process for exercising your options over time, or (iv) exercise as early as possible to minimize the tax ramifications. You also may decide to mix and match these strategies into a tailored solution that offers you the highest likelihood of successfully meeting your personal financial goals.

Yes, holding too many options or shares (as a percentage of your total wealth) can expose you to concentration risk. Having too much of your money is a single stock increases the risk that, if the stock price goes down, you might lose a significant portion of your worth. If you have enough assets or earning capacity elsewhere, you may decide to tolerate a higher degree of concentration risk with your equity compensation, hoping to “strike it rich.” On the other hand, if your financial well-being depends on keeping profits already achieved, it may be time to reduce your stock and stock option concentration risks. A general rule of thumb is to avoid having your company stock + options exceed 10–15% of your total wealth.

There is no universally correct answer for whether to exercise your ISOs pre- or post-IPO. Either approach has advantages and disadvantages, with outcomes that depend on a future nobody can predict. The best decision for you hinges on individual tax considerations, your personal circumstances, and how your options mesh with your greater financial plans.

If you exercise pre-IPO and the stock appreciates, you could score a lower upfront AMT bill, and start your qualifying disposition holding period sooner than later. This can give you favorable tax rates when you sell the stock. However, a pre-IPO exercise also has its disadvantages. You could be left holding unsellable stock of low or no value if the IPO never occurs, or the share price declines.

Essentially, your ISOs could end up being worth anywhere from a vast fortune … to nothing at all. Either way, it is usually hard to value or sell exercised ISO shares until after your company has completed its IPO. And there’s never a guarantee an IPO will come soon, or indeed, ever. Your company may instead secure private funding to fuel its growth, or it may not grow to the point that warrants an IPO. Even once an IPO is in the works, it could be delayed or canceled if market conditions change. Given the uncertainty, we recommend including a healthy dose of contingency planning in your financial plans.

Once your company completes its IPO, there is usually a lockup period, during which you probably won’t be able to sell any of your shares. It depends on the agreement your company has with the investment bank helping your firm go public, but a typical lockup period includes the six months following the IPO.

Some companies may offer an early lock up release as part of a standard lockup. An early lock up release may allow for limited ability to sell a portion of equity if and when certain metrics are obtained. Not all companies offer this, and the rules can be specific, so you’ll want to check your plan agreement to know the details.

If you exercise your ISOs post-IPO, you can trade your purchased shares on a public exchange among a global forum of buyers and sellers. If you exercise and purchase shares pre-IPO, you will own shares of a non-public company, which you may or may not be able to sell to another party until the company completes its IPO. Even if you can sell pre-IPO shares, there may be significant restrictions, and it can be hard to determine their fair market value.

If you exercise your options and sell all the resulting shares at the same time, no additional taxes are incurred. If you exercise and hold any shares to sell at a future date, any profit you incur on that future sale will be taxed as a capital gain. Capital gains on shares held more than a year are taxed at more favorable long-term gain rates. Capital gains on shares held a year or less are taxed at short-term rates, which are currently the same as ordinary income tax rates.

You’ll want to check the specific terms of your offer, but you can generally exercise your NQSO any time after they vest. However, some companies may offer an early exercise provision that allows you to exercise before they vest.. You have until the expiration date, usually 10 years after vesting, after which any unexercised options will expire. So, in brief, you can exercise your NQSOs any time after they vest but before they expire.

A common consensus is to sell stock that is delivered from vested RSUs as soon as possible, as they are taxed identical to other income like your wage or bonus. Said another way, its as if you used after-tax take-home pay to go buy shares of stock on the open market. If you wouldn’t use your take home pay to buy stock, why should you keep the shares of stock from RSUs?

However, for nearly every rule of thumb, there are exceptions. For example, if you have met your other financial planning needs and have a level of concentration risk that is suitable, owning stock in a company can be a suitable part of your investment strategy.

Stock appreciation rights look and act very similar to non-qualified stock options. They are granted as part of a compensation package and upon receipt, they’re issued with key dates and figures of which you should be aware of, including grant date, exercise (strike) price, vesting date, and expiration date. Learn more

A stock appreciation right, or SAR, is a compensation tool that employers can use to attract and retain key employees. Like non-qualified stock options and incentive stock options, stock appreciation rights allow you to benefit from appreciating stock prices should the company’s stock price increase. Learn more