Incentive Stock Options – Cut your taxes and plan!
One way to incentivize employees to work harder is to provide them with employee incentive stock options. This type of stock option usually vests in one year or more after the employee has been with a company. Once vested, a beneficial incentive stock option allows the employee to buy the stock at a below market price thus locking in an immediate profit. Many times the amount of money required to cover the purchase of the stock is far more then the cash on hand the employee has so they elect to sell the stock immediately. A major problem with this strategy is that the profit on the incentive stock option is taxed at an ordinary tax rate if sold immediately; whereas holding the exercised incentive stock option for more than a year will result in a capital gains tax rate of 15% or less. Thus, an exercised stock option that is sold right away with a big profit can result in a taxpayer paying thousands of dollars more in income taxes than if they hold the incentive stock option for more than one year.
Stuart Steinberg, CPA, MBA has owned a strategic tax planning practice on the North Shore for 23 years. Please feel free to contact him anytime and let Erock Tax take care of you!