Taxes are often a concern for employees with stock options,
which is the right to buy company stock at a specific price for a set period.
However, if someone earned less in 2021 or expects to make
more in 2022, they may consider ways to accelerate stock-based income before
For example, someone may sell stocks to lock in current
rates. Or they may buy, known as “exercising,” so-called non-qualified stock
options, a type of employee compensation that triggers regular income tax when
However, there are several factors that employees need to
consider before making these moves, according to financial experts.
“There are a lot of moving parts, depending on the type [of
stock options] you have, tax implications and other personal scenarios,” said
certified financial planner Daniel Zajac, partner at Zajac Group in Exton,
Exercise non-qualified stock options
Non-qualified stock options offer the chance to buy company
stock at a set price, and employees may earn a profit if the value has
increased when they decide to sell.
However, when employees exercise, they owe regular income
taxes on what’s known as the “bargain element,” or the difference between the
current stock value and exercise price, which may create a hefty tax bill.
“People are very aware that it is a taxable event,” said
Kristin McKenna, CFP and managing director at Darrow Wealth Management in
Boston. “They are not aware that withholding is done at these flat rates, and
it’s probably not enough.”
But more important, employees need to consider if exercising
stock options aligns with their financial goals. There’s an opportunity cost of
spending money upfront, and owning a large stock concentration for a single
company may be risky.
“How do you feel being an owner and a shareholder of this
company right now?” asked Chelsea Ransom-Cooper, CFP and managing partner at
Zenith Wealth Partners in New York.
“The biggest thing that I remind clients is it’s not all or
nothing,” she said, explaining someone may have time to spread out purchases or
make a decision in the future, depending on stock option expiration dates.
Sell previously held stock
Selling company stock is another way to accelerate income
into 2021. But advisors typically consider more than taxes when deciding to
“Tax is just one part of the equation,” said Zajac,
explaining someone may decide to sell stocks to fund another goal or they may
be eager to diversify their investments.
Moreover, selling another type of compensation, incentive
stock options, may add another layer of complexity.
Although incentive stock options don’t create regular income
tax at exercise, the bargain element – or difference between the current stock
value and exercise price – creates an adjustment for the so-called alternative
minimum tax, a parallel system for higher earners, that may cause a bigger tax
When dealing with incentive stock options, advisors may need
to run tax projections to help clients decide the best move.
“I always recommend talking to a tax advisor and a financial
planner before doing anything,” McKenna added. “You can’t undo these things
once you’ve done them.”
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