The critical tax and investment decisions related to stock compensation need to be carefully analyzed on a case-by-case basis. This applies for all stakeholders in the tech industry and all other stock compensated positions.
Expert Stock Compensation Advisors - Personal Guidance.
Often, stock compensated employees attempt to do this analysis alone and end up with negative tax and investment results. Working together with our Experienced Team of Financial Planners and Investment Advisors positions you to make well planned and well executed decisions to get the most from your equity compensation. Let our stock compensation advisors help you.
Cash Planning – Planning for Exercising Your Stock Options
- Establish a budget to save the funds needed to exercise options
- Generate liquidity to pay-off additional taxes that may result from grant, exercise, or vesting
- Set salary deferral targets in ESPP’s as part of an overall budget
Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, and Employee Stock Purchase Plans — The Most Common Types of Stock Compensation
- Review the different tax consequences of ISOs, NQSOs, RSUs and ESPPs
- Develop the best strategies to help minimize your tax liability
Incentive Stock Option (ISO), offers preferential tax treatment and must adhere to special conditions set forth by the Internal Revenue Service. This option may allow employees to avoid paying taxes on the stock they own until the shares are sold. When the stock is ultimately sold, short or long-term capital gains taxes are paid based on the gain. This tax rate is lower than ordinary income tax rates for long-term gains and is currently 15-23.8% depending on the income tax bracket of the taxpayer. This applies if the employee holds the shares for at least a year after exercise and two years after grant. The short-term rate is the same as ordinary tax rates and usually ranges from 25% to 39.6%.
Alternative Minimum Tax (AMT) is a huge consideration for those exercising ISOs here in California, as the spread between the fair market value at exercise and the strike price of the ISO creates an AMT tax adjustment. We like to refer to AMT as the Maximum Mandatory Tax, because if it is larger than the regular tax, you are required to pay the AMT. Californians pay high State income taxes and local property taxes, which are not deductible for AMT.
Non-Qualified Stock Options (NSO) do not receive preferential tax treatment. Thus, when one purchases stock (by exercising options) the regular income tax rates will apply on the spread between the purchase price of the stock and the market price of the stock at that time. In the rare instances where NSOs have a readily determinable fair market value on the grant date the value of the option at grant will be taxable as compensation.
Restricted Stock Units (RSU) are shares that are not given outright to employees but rather vest over a period of time usually associated with length of service to the company. The vesting period also delays the payment of taxes by the recipient of the stock. When the stock has been held for the vesting period, the employee pays income tax on the value of the restricted stock in the year in which it vests, and then pays capital gains tax on any subsequent appreciation or depreciation in the value of the restricted stock in the year in which it is sold.
Investment Planning & Education – When & How to Diversify
- Pros & cons of retaining concentrated employer stock positions vs. diversifying to a global portfolio
- Weighing the merits of your investment decisions against tax consequences
- Learning about the various investment options available to diversify concentrated stock positions
- Individual stocks & bonds
- Index funds
- Mutual funds
Complimentary Stock Compensation Tax Review – ESPPs, ISOs, NQSOs, & RSUs
- Gather the documents for your equity grant package
- Prepare a list of questions you want to discuss
- Contact Us for a Complimentary 1-Hour Stock Compensation Plan Review in person, by phone, or a video-conference
Marin Wealth Advisors LLC is not a CPA or tax preparation firm.
We work closely with our clients’ CPAs and tax professionals to provide the best possible financial planning and investment advice.