Tax Planning Dilemna

[S T]

How does one accomplish tax planning on "stock option exercise" through their employer?
Seems like everything is on the "if come" and of course the exercise is always grossed up on the W-2 as ordinary income - so doesn't the capital gain treatment just vanish with this?

I have a client that "states" that there is a $250K gain on the option and wants to know whether to "sell it or hold it" And then, this client always has "huge "capital gains" and dividend income from other transactions, so she is always subject to AMT and runs around the 33% to 35% tax bracket

Hmmm?

Sandy

[JohnH]

Well, they could always just let the options expires, forego the income, and not have to worry about all those messy tax compllications,.

[ChEAr$]

Two scenarios

How does one accomplish tax planning on "stock option exercise" through their employer?
Seems like everything is on the "if come" and of course the exercise is always grossed up on the W-2 as ordinary income - so doesn't the capital gain treatment just vanish with this?

I have a client that "states" that there is a $250K gain on the option and wants to know whether to "sell it or hold it" And then, this client always has "huge "capital gains" and dividend income from other transactions, so she is always subject to AMT and runs around the 33% to 35% tax bracket

Case 1 occurs when as you mention first above the stock is granted and exercised on the same date, with employer lending money to purchase the stock thru their favorite broker, but immediately being paid back on same day sale. Taxes are then withheld on the gain which then appears on the W2. Sale is reported on 1099B and must be reported on schedule d, but result is always a short term loss amounting to broker's fee.

Case 2 occurs when stock option is exercise and employees goes ahead and purchases the stock at the option price, then holding the stock until time to sell. Whether to
hold 'em or fold 'em, is a financial decision of course.

[OtisMozzetti]

there ARE some ways to mitigate the tax

The answer depends whether the "option" is an ISO or a nonqualified option.

If it is an ISO, then a way to consider is to stagger out the exercises over what is probably a longer term of that elite option. In that way, the regular tax on the spread comes to be treated as a long-term gain, while the negative adjustments (for higher AMT basis) on Form 6251 can be made to net out with the positive adjustments on exercise of ISOs. The problem with that sort of planning is that the vast majority of the nouveau elite choose to take the money and run (same-day exercise and sell) via a disqualifying disposition of their ISO's, resulting in the spread being treated almost completely just like plain old wages. Whatever is done, remember that AMT and regular tax are affected by the overall AMTI and overall AGI, so there is need to plan out the year(s) of exercise while also keeping in mind the prospects of the investment itself.

EA in California

[Snaggletoof]

Dry the Tears

I have a client that "states" that there is a $250K gain on the option and wants to know whether to "sell it or hold it" And then, this client always has "huge "capital gains" and dividend income from other transactions, so she is always subject to AMT and runs around the 33% to 35% tax bracket

Sandy, a sad story like this always brings me to tears. Your client has problems I would love to have.

Seriously, your obligation to minimize her tax bite is still there, and not as humorous as myself or John H. If she has large capital gains, does she have some stocks or mutual funds she can sell at a whopping tax loss? Mutual Funds are not nearly back where they were before the crash, and she can turn around and buy them back the very next day, so long as she doesn't buy back the exact same fund.

Last time I was involved in stock options there was a portion of the windfall that was reportable as capital gains that didn't seem right, but it was codified. I don't remember the exact details so I suppose I should not even be conversive about it. But it was surprising, and very real.