If you’re an executive with a larger company, you may receive incentive stock options (ISOs). ISOs receive tax-favored treatment but must comply with many rules. ISOs allow you to buy company stock in the future (but before a set expiration date) at a fixed price equal to or greater than the stock’s fair market value at the date of the grant. Therefore, ISOs don’t provide a benefit until the stock appreciates in value. If it does, you can buy shares at a price below what they’re then trading for, as long as you’ve satisfied the applicable ISO holding periods. Here are the key tax consequences:
* You owe no tax when the ISOs are granted.
* You owe no regular tax when you exercise the ISOs.
* If you sell the stock after holding the shares at least one year from the date of exercise and two years from the date the ISOs were granted, you pay tax on the sale at your long-term capital gains rate.
* If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.
If you’ve received ISOs, plan carefully when to exercise them and whether to immediately sell shares received from an exercise or hold them. Waiting until just before the expiration date to exercise ISOs (when the stock value may be the highest, assuming the stock is appreciating) and holding on to the stock long enough to garner long-term capital gains treatment often is beneficial.
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Since 1999, Berrios & Associates, Inc. has been providing a distinctive mixture of leadership-knowledge, and customer service satisfying client needs in advisory, tax, and outsourcing. Serving a diverse client base from individuals and sole proprietors to private corporations with nationwide and international locations. In the domain of accounting firms, Berrios & Associates has engraved a distinctive business based on diverse solutions through the interpersonal relationship of corporate and personal tax, corporate back office support, and business growth advisory. The firm directs clients through their everyday operations to ensure they have the right business model in place to meet their business goals.