Your clients and prospects may receive incentive stock options (ISOs) as a company benefit, and look to you for recommendations and point of view.

Did You Know?
ISOs are subject to a vesting schedule established by their employer. Typical vesting schedules are between 3-5 years.

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Key Takeaway

Your client can exercise their ISOs in 3 ways: Exercise and hold (cash exercise), exercise and sell (same day sale or cashless exercise), or sell to cover. Understand the tax treatment specific to ISOs to benefit your client in the long run.

Questions to Ask Clients and Prospects

Conversation starters to help gauge their level of understanding, meet them where they are and present the appropriate options.

Question

Do you receive ISOs as part of your compensation?

Question

Do you receive ISOs as part of your compensation?

Why Ask This?

ISOs are employer stock options that qualify for a deferral of any tax payment until the acquired shares are sold. ISOs require employees to pay for the shares acquired and vest over time.

Question

Do you know the vesting schedule for your ISOs?

Question

Do you know the vesting schedule for your ISOs?

Why Ask This?

Your client or prospect can choose when to exercise vested options and how many to exercise. A maximum of $100,000 (grant value) of ISOs can vest in any calendar year, with any awarded options above this amount converting automatically to nonqualified stock options.

Question

Do you know when ISOs are taxed?

Question

Do you know how your ISOs are taxed?

Why Ask This?

ISOs are not taxed when they are awarded or exercised. The cost basis on the shares is the grant price. Exercising ISOs can also trigger Alternative Minimum Tax (AMT), as the discount received on shares acquired through exercise is included in the AMT income calculation if the shares are not sold in the year of the exercise.

Question

Do you know the main considerations with ISO taxation?

Question

Do you know the main considerations with ISO taxation?

Why Ask This?

  • Clients and prospects should consult with a tax professional to understand potential AMT consequences before selling ISOs.
  • Qualifying dispositions of ISO shares eliminate ordinary income tax on the discount received by acquiring stock below market price. Gains over the grant price are taxed as capital gains.
  • The qualifying disposition thresholds for ISOs are at least two years from grant and at least one year from exercise.
  • If a sale of ISO shares does not meet the qualifying disposition threshold it will be considered a disqualifying disposition and will cause the discount received by acquiring stock below market price to be taxed as ordinary income.

Next Step

Start by asking clients and prospects if their options are vested, and if not, run through some potential “what-if” scenarios with them.

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The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Tax laws are complex and subject to change. Investors should always consult their own legal or tax professional for information concerning their individual situation.