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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 commonly called the AMT crossover point and is basically the point beyond which you will start to pay AMT on additional ISO exercises.

How many ISOs can she exercise without going into 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. Once this is achieved, you can exercise and hold ISOs back up to the AMT crossover point. You can also use nonqualified stock options NQSOs to generate the additional ordinary income needed to execute this strategy. Earlier we determined that the taxpayer could exercise and hold about ISOs before reaching the AMT crossover.

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.

Should I exercise my 'in-the-money' stock options? | Calculators by CalcXML

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.

optionsXpress | Xpress Guides: Exercising Options

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. Assume on January 5th you exercise ISOs for TechStock. 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. Toby Johnston, CPA, CFP, is a partner with the Moss Adams LLP Wealth Services Practice.

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Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Toby Johnston CPA, CFP is a partner with the Moss Adams LLP Wealth Services Practice. Many young executives worry about triggering taxes by exercising options. But, as Kent Williams, founding….

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Wealthfront Knowledge Center Your source for data-driven advice on investing and personal finance. Tags AMT , employee compensation , Incentive stock options , IPO lockup , ISOs , mistakes , Nonqualified stock options , NQSOs , RSUs , Silicon Valley , stock options , taxes. About the author Toby Johnston CPA, CFP is a partner with the Moss Adams LLP Wealth Services Practice. View all posts by Toby Johnston, CPA, CFP Questions? Explore our Help Center or email knowledgecenter wealthfront.

Avatars by Sterling Adventures. Related Posts Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 1. Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 2. Applying the Tax Law to Common Employee Stock Situations In the first part of…. Strategies For Selling Stock Post-IPO.

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