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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 15431
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I have private company stock options that were granted to me

Resolved Question:

I have private company stock options that were granted to me upon hire. I am wondering what my options are for exercising and holding these private options/shares. Can I hold the options themselves in a tax-advantaged account such as an IRA (preferably a Roth IRA) for execution at a later date?

If I can't hold the options in the account, can I exercise them at the strike price and put the actual shares into the IRA? If so, how is the contribution amount calculated - strike price total or "current value"?

If neither of these scenarios is possible, what is the best way to limit my tax obligation as these shares (hopefully) increase in value?

Additional information that may help: The company conducts an annual valuation exercise to determine the strike price for options issued in the subsequent year. I live in Georgia and am a full-time non-executive employee. I currently have a Roth IRA, traditional IRA and a 401k.
Submitted: 1 year ago.
Category: Finance
Expert:  Megan C replied 1 year ago.

Megan C :

Thank you for your question, and thanks for using JustAnswer.com

Megan C :

Do you have an ISO or Non-qualified stock options?

Megan C :

I am assuming you have non-qualified stock options because you are worried about current tax

Customer:

Hi Megan, I assume they are non-qualified options as I don't know what that term means.

Megan C :

Well, with an ISO, you are not taxed until you sell the shares. This is Incentive Stock Options.

Megan C :

Non qualified stock options you are taxed on the difference between the exercise price and the fair market value upon purchase

Megan C :

But, you cannot hold these investments in a tax deferred account such as your IRA

Customer:

You are correct, I just checked and the options are non-qualified.

Megan C :

Okay thanks for checking

Customer:

Ok, what are my options for reducing my tax liability when exercising these options?

Megan C :

Well, unfortunately the options are the same as reducing your liability for any other form of income

Customer:

I believe that if I exercise them today and wait 2 years or more to sell them I can avoid capital gains taxes?

Megan C :

business losses, itemized deductions, etc

Megan C :

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

Megan C :

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.

Customer:

So would I be best served to exercise the entire option grant now if I believe the company will continue to grow in value?

Customer:

Or am I better off exercising them in small blocks each year

Megan C :

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

Customer:

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?

Customer:

*ceiling percentage

Megan C :

$400,000 you reach the 39% tax bracket

Customer:

Ok, thank you for the info. You have been a great help!

Megan C :

I'm glad I could help

Megan C :

If you would, please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today

Customer:

You bet, have a great weekend

Megan C :

You too

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 15431
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and other Finance Specialists are ready to help you
Expert:  Megan C replied 1 year ago.
Thanks, JJ for your positive rating. Please come back and visit me any time you have a tax, finance, or social security question. It was a pleasure working with you today.

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