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incentive stock options Archives - Help with mergers & acquisitions, raising capital, creating stock options and other equity plans

Posts Tagged ‘incentive stock options’

How AMT Changes Impact Incentive Stock Options

Have congressional changes affected your stock options?

Have congressional changes affected your stock options?

If you’re a high-income taxpayer, especially one that exercises incentive stock options, here’s something to be aware of: changes to the alternative minimum tax (AMT) could make an impact on your taxes.

ATRA’s Revisions to AMT

It used to be that Congress temporarily increased the AMT annually as a way to keep middle-income taxpayers from needing to pay the alternative minimum tax unfairly. Although it worked, the process was last minute, politically charged, uncertain and took a lot of time and negotiation. But without the increases each year, the AMT exemption amounts would impose the tax on a large population of the middle-income taxpayers, a demographic it wasn’t ever intended for. So the American Taxpayer Relief Act (ATRA) was enacted.

Here are three alternative minimum tax provisions from the ATRA:

  1. The AMT income exemption amounts set by ATRA for 2012 were $50,600 for single filers and $78,750 for married joint filers. It also did something that was completely new: it permanently indexed the exemption amounts for inflation in future years, which means that each year the alternative minimum tax income exemption amounts will automatically increase.
  2. Another first, the ATRA indexed where the phase out of the alternative minimum tax income exemption begins. The exemption amounts are phased out by a quarter for every dollar of specified exemptions. So in 2013, the range for single filers starts at $115,400 and for married joint filers it begins at $153,900, and the exemption is completely phased out when AMT income reaches $323,000 for single filers and $477,100 for married joint filers.
  3. The ATRA also indexed the income threshold where the AMT rate goes from 26% to 28%, which is another first. In 2013, both unmarried single filers and married joint filers reach the threshold at $179,500, and married people that choose to file separately reach the threshold at $89,750.

The Impact on Incentive Stock Options

How does this impact incentive stock options? As we explained in our post about Employee Stock Options last month, “taxes are due in the year that a sale takes place. If the incentive stock is held for over a calendar year, the employee must record the value of stock on the original exercise date. This value should be reflected in an employee’s AMT (alternative minimum tax) calculation.”

Do you have a question about the ATRA, AMT or incentive stock options? Contact us today – we can help!

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

Photo Credit: Sai89AJ

Employee Stock Options

What exactly is an ISO?

Employee stock options, as explained last week, are stock options that are offered to employees from their employer. Businesses often grant employees a share of the company’s stock. While the different stock options they give may seem confusing, we are here to ensure that the process is as clear and simple as possible. Today, we will talk about one kind of employee stock option called an incentive stock option.

What is an incentive stock option? Let us define it…

Incentive Stock Option: An incentive stock option, or ISO for short, is a stock option that is only available to employees. This exclusiveness comes with both pros and cons. This option will not affect your income tax if the shares are held for at least two years from the grant date and one year from the date of exercise.

What are the grant date and exercise date?

The grant date is the date that the company grants an employee the shares of the incentive stock. The exercise date is the date that the employee exercises their ability to purchase the shares of the incentive stock.

What if I do not wish to hold the stock for the two year time period?

If an employee who purchases the incentive stock seeks to sell the stock back before the two year period is over, then any gain on the incentive stock is taxed as regular income. The tax gain must be reported on an employee’s W2 form.

What if I sell the stock after the two year mark?

Taxes are due in the year that the sale takes place. If the incentive stock is held for over a calendar year, the employee must record the value of stock on the original exercise date. This value should be reflected in an employee’s AMT (alternative minimum tax) calculation.

We hope this was helpful in deciding if an incentive stock option is best for you. Keep in mind that there are a multitude of other employee stock options. Do not hesitate to contact us with any questions you may have. If you or anyone else you know is hoping to learn more about an incentive stock option, or employee stock options plan, then we urge you to contact Stock Connections, today.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

Photo Credit: FaceMePLS

W-2 and Disqualifying Dispositions

What’s on your W-2?

Tax season is near and there are a few things all companies must know in order to be prepared. A qualifying disposition refers to the transferring, selling, gifting or exchanging of stock before the ISO has satisfied its holding period. But what is included in a W-2 in connection with a disqualifying disposition of shares acquired under incentive stock options?

According to My Stock Options, if incentive stock options are sold, gifted or transferred within one year of the exercise date or two years off the grant date, it is considered a Disqualifying Disposition. This happens because the employee is losing the tax benefits they would otherwise have with qualified dispositions if they had not sold, transferred or gifted the ISO. This, however, does not apply to incentive stock options that are transferred to a joint account with a spouse, transferred to a spouse in the event of a divorce, transferred from account to account (both owned by the recipient), or after the employee’s death. These are not considered dispositions.

How does this affect an employee’s W-2? If they decided to take the disqualifying disposition road, the company will report it on their W-2. Keep in mind that the company is also not required withholding Social Security taxes (FICA) if the employee purchases the stock or any income tax when they sell the stock. At this point, it is not considered capital gains and it is taxed as a regular income, which the employee is required to report on a W-2.

As described in Incentive Stock Options by William Perez, a disqualifying disposition can be taxed in two ways, “There will be compensation income (subject to ordinary income rates) and capital gain or loss (subject to the short-term or long-term capital gains rates).” Here are five steps to figure out the tax calculations of a disqualifying disposition.  Have questions about your stock options? We’d love to help! Contact us today.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

Image Credit: Phillip Taylor PT

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