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Do you have an ISO or Non-qualified stock options?
I am assuming you have non-qualified stock options because you are worried about current tax
Hi Megan, I assume they are non-qualified options as I don't know what that term means.
Well, with an ISO, you are not taxed until you sell the shares. This is Incentive Stock Options.
Non qualified stock options you are taxed on the difference between the exercise price and the fair market value upon purchase
But, you cannot hold these investments in a tax deferred account such as your IRA
You are correct, I just checked and the options are non-qualified.
Okay thanks for checking
Ok, what are my options for reducing my tax liability when exercising these options?
Well, unfortunately the options are the same as reducing your liability for any other form of income
I believe that if I exercise them today and wait 2 years or more to sell them I can avoid capital gains taxes?
business losses, itemized deductions, etc
You only avoid capital gains tax if your income is in the 10-15% tax bracket. You would, however, qualify for the lower preferred rate for long term capital gains
But, your tax basis is equal to the fair market value on the date you purchased the shares, since you paid tax on that amount.
So would I be best served to exercise the entire option grant now if I believe the company will continue to grow in value?
Or am I better off exercising them in small blocks each year
That's a matter of preference. If you do smaller blocks you may have lower tax from year to year, but if the company keeps growing then you will have even more income in those subsequent years
My wife and I file jointly and earn about 175K per year. At what level do we reach the highest tax bracket and it no longer matters how much further income we have as it will all be taxed at the same ceiling amount?
$400,000 you reach the 39% tax bracket
Ok, thank you for the info. You have been a great help!
I'm glad I could help
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