Year-End 2024: Post-Election Tax And Financial Planning

While the tax and financial-planning environment at year-end 2024 is the same as in the past few years, the outcome of the 2024 election looms large this year. The results—Donald Trump’s second presidency and a Republican majority in Congress—have added some clarity on taxes but have also introduced areas of uncertainty.

The longer-term outlook for the tax laws and the stock market is a key factor at year-end 2024 for employee stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), and related holdings of company shares.

Tax-Planning Outlook

The Republican-driven Tax Cuts & Jobs Act (TCJA) will expire after 2025 unless it is extended or made permanent. Before the election, when the White House and Congress were considered a tossup, the tax landscape after 2025 was anyone’s guess. Wildly different outcomes were possible, from tax hikes to tax cuts. The Republican sweep of the White House and Congress has removed at least some of that uncertainty.

“The extension of the Tax Cuts & Jobs Act beyond 2025 seems to be locked in,” believes John Barringer, Managing Partner of Executive Wealth Planning in Denver. He was one of three experienced financial advisors who spoke during a recent myStockOptions.com webinar on year-end planning.

While it is tempting to think that the incoming Republican White House and Congress will not just extend the TCJA but actually make it permanent, all three of the webinar’s advisor panelists expressed doubt about that extreme. Even the webinar audience of advisors seemed to agree. In a poll conducted live during the webinar, about 70% of the attendees indicated that they believe the TCJA will be extended but not made permanent.

Nevertheless, the advisors who spoke during the webinar are confident enough about an extension to reallocate their planning focus to other areas. “A lot of our planning was built around the TCJA expiring,” said webinar panelist John Owens, Managing Partner of Brooklyn FI in New York. “In light of the election, multiyear planning at year-end has shifted. We may have a broader timeframe to think about how we space out ordinary income. It means that state taxes actually matter more, now that federal tax rates will stay similar to what they are.”

Plenty of other open tax-law issues remain that could affect planning for equity compensation. Some, for example, involve the calculation of the alternative minimum tax (AMT), a big concern for anyone with incentive stock options (ISOs).

In 2018, the TCJA increased the AMT income exemption amounts and substantially raised the income point where the exemptions start to phase out. Those moves made it less likely for employees with ISOs to trigger the AMT after they exercise the options and hold the stock. The spread at exercise is part of the AMT income calculation when the shares are held beyond the calendar year of exercise.

However, policy discussions in Congress suggest that the $10,000 cap on itemized deductions for state and local tax (SALT) may be increased or eliminated. The amount of the SALT deduction is added back as part of the AMT income calculation. Moreover, to pay for a higher SALT cap, Congress might then have to reconfigure the AMT income exemptions and phaseouts themselves. These potential changes could bring the risk of the AMT back into play for more people with ISOs.

“We’re looking at a lot of ISO exercises right now for either this year or next year,” said webinar panelist Rebecca Conner, the founder of SeedSafe Financial in Austin, Texas. “If that SALT cap is eliminated, my California clients are going to have a very large add-back in their AMT calculation.”

Other potential modifications to tax rules could be engineered by the Trump White House without recourse to Congress. For example, near the end of his first White House term, President Trump sought a way to require the IRS to issue rules that would index for inflation the all-important cost basis used to calculate capital gains and losses when shares are sold. Indexing capital gains for inflation has long been a GOP goal and seems likely to be attempted again.

Stock-Market Outlook

One area of increasing uncertainty is the direction of stock prices for employees with equity compensation and holdings of company shares. Amid the promise of tariffs, deregulation, immigration restrictions, increased domestic energy production, and other factors, how will the second Trump administration affect your company’s stock price and therefore your equity comp planning?

“That probably depends on what industry you’re in,” explains John Barringer, a seasoned veteran of many market eras and economic cycles.

“If you work for a company in the energy or financial sector, the next four years will probably be good ones for you,” he noted, citing President-Elect Trump’s stated ambition to ramp up domestic energy production. However, John observed, Trump’s well-known policies targeting immigration may be bad news for some sectors. “If you work for a company that relies on immigrant labor, like hospitality, agriculture, homebuilding, meatpacking, or education, you may find it difficult to meet your performance goals.”

The ways in which the Trump tariffs play out will also be a factor, especially in technology sectors. “If you’re a tech worker at an established company that relies on Asian manufacturing, sales may be a little slower,” John warned.

Overall, however, short-term economic indicators seem to offer a salubrious outlook for company stock performance. “The market is acting like it believes growth with higher inflation will be a good thing,” John said. “The US dollar is stronger because the US is probably going to continue to outperform the rest of the world. Cyclical industries, like financials, are leading the way.”

John believes that optimism about deregulation could translate into an uptick for mergers, acquisitions, and initial public offerings (IPOs). This would be good news for employees in late-stage pre-IPO companies who have seen the postponement of the M&A or IPO liquidity events that they need to cash in on their equity awards. “If you’re working at a startup, there may be a light at the end of the tunnel for your delayed IPO,” he said.

John Owens of Brooklyn FI thinks the potential for more IPOs is strong enough to make this a good time to evaluate exercising ISOs in private companies. You would then hold the ISO shares long enough to get the best tax treatment at sale.

Year-End Equity Comp Planning Moves In 2024

The election has not changed the immediate environment for year-end financial planning in 2024, with advisors recommending many of the standard strategies that apply every year. For more on those, see a related article Advisor Insights On How Market Uncertainty Impacts Year-End Planning For Options, RSUs, And ESPPs.

One major strategy involves multiyear planning and income-shifting if you expect a spike in income (e.g. from equity compensation, a raise, or a big cash bonus) or a change in your job status. If you anticipate that you will be in a higher tax bracket in 2025, consider ways to accelerate income into 2024 or spread out exercising over two years. For example, you may want to exercise nonqualified stock options (NQSOs) or sell company stock from an RSU vesting with large capital gains.

“Do we have some ‘bracket space’ within which we could exercise some options and stay in our marginal bracket to meet our diversification goals?” is something that John Barringer asks his clients. John Owens agrees. “Consider bracket management if you’re likely to see an ordinary income tax hike, especially with NQSOs,” he said during the myStockOptions webinar.

For clients with incentive stock options, Rebecca Conner routinely conducts a review of ISO exercises made earlier in the year to assess the risk of triggering the AMT on shares held beyond the calendar year of exercise. “Evaluate whether to sell them in the calendar year and exercise other ISOs.” She weighs whether clients should “lean into” exercising other ISOs, especially if the company’s stock price has been volatile.

John Barringer takes his clients through stock option grants that may be nearing their expiration date. “Old grants or ones that will expire soon should still be evaluated for exercise. How are we doing on our other goals, especially retirement? Can an equity exercise further fund it?”

Further Resources

The webinar in which the panelists spoke is available to stream on demand. At myStockOptions, we have comprehensive education and guidance on year-end financial and tax planning for stock options, RSUs, ESPPs, and company shares in our section Year-End Planning.

Equity Comp Masterclass: Special Three-Part Webinar Series

At the myStockOptions Webinar Channel, our 2024 Equity Comp Masterclass series of three webinars proved to be one of our most popular offerings yet. You can now watch the full series on demand. Each webinar includes the detailed slide deck, checklists, and handouts via the webinar player.

Register for the full masterclass series of three webinars at a special package price ($395) or for any of the individual webinars, listed below:

Part 1: Stock Options ($149)
1.0 CE credit for CFP, CPWA/CIMA, and CEP/ECA

Part 2: Restricted Stock/RSUs & ESPPs ($149)
1.0 CE credit for CFP, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors ($189)
2.0 CE credits for CFP, CPWA/CIMA, and CEP/ECA

Parts 1 and 2 cover essential topics (including taxation) and feature plentiful examples. These two 60-minute webinars are presented by Bruce Brumberg (JD), the editor-in-chief and co-founder of myStockOptions.com and a Forbes.com contributor. Bruce is a highly respected expert who explains these topics in a practical, memorable, and engaging way.

Part 3 brings together all the fundamentals and taxation. The webinar features leading financial advisors actively working with clients who have equity compensation. They provide their top tips and real-world case studies. Panelists:

• Megan Gorman (JD), Founder, Chequers Financial Management
• Chloé Moore (CFP®), Founder, Financial Staples
• Danika Waddell (CFP®, RLP®, CSLP®), Founder, Xena Financial Planning
• Daniel Zajac (CFP®, EA), Managing Partner, Zajac Group
• Bruce Brumberg (JD), Editor-in-Chief and Co-Founder, myStockOptions (moderator)

Whether you are new to stock comp or want to sharpen your knowledge, these webinars will provide practical info and insights to maximize your success.

The Tao Of Stock Options: Exercise Strategies From Stock Option Gurus

When we started myStockOptions.com in 2000, stock options were all the rage in equity comp. While other forms of equity compensation have since come to the fore, most notably restricted stock units (RSUs), stock options remain a major form of equity award for millions of employees in the US.

In this spirit, we recently returned to the roots of our trusted brand name in a very popular webinar, Stock Option Exercise Strategies: Advanced Bootcamp. During this educational event, three experts in option financial planning presented their tips for making the most of an option grant, from basic to advanced concepts. Some of the insights from these option gurus are summarized below.

The Tao Of Stock Options: Be Patient, Grasshopper

Taoism tells us that mindfully strategic inaction, expressed in the concept of wu wei (literally "doing nothing" in Chinese), is often the most effective approach to the challenges of living. And so it often is with employee stock options. Waiting as long as possible to exercise stock options—i.e. doing nothing and letting the value grow until a strategic moment—is often the soundest exercise strategy.

It’s important to note that there are two types of stock options with very different tax treatments. Nonqualified stock options (NQSOs) are the simpler and more common type. Incentive stock options (ISOs) are less common and more complex in that they can offer potential tax advantages but more risk. Most of the discussion in this article concerns NQSOs in public companies.

1. Waiting To Exercise Is Often Best

Stock options let you buy shares of your company’s stock at a fixed price for a specified period, typically over a term of 10 years. Under nearly all grants, you have to work at the company for a specified length of time (the vesting period) before you can exercise the options. If you leave your company, the vesting stops and the term usually ends much earlier, requiring you to exercise the options soon after your departure to prevent forfeiture. These rules and time periods can vary according to the reason you left work (e.g. job change, disability, death, retirement).

Private companies sometimes grant stock options that employees can exercise early, allowing you to start the capital gains holding period sooner and recognize little or no income at vesting. You want to check whether you have this type of stock option and carefully follow the rules (e.g. a timely Section 83(b) election), though this is not the focus of this article.

Options Align Your Pay With Company Performance

In short, stock options let you share in the growth of your company's value without any financial risk until you exercise the options (i.e. acquire shares). If your company’s stock price rises during the option term, the discount between the current stock price and your lower exercise price (the “spread”) can make stock options valuable for creating substantial wealth.

Leverage And Tax Deferral

The fixed purchase price creates the famous financial “leverage” of stock options. For example, if the stock price rises by 20%, the value of your unexercised stock options grows by much more than 20%. As soon as you exercise the options and thus purchase actual shares of stock, the leverage ends. Thus it’s important to think carefully about the right moment to make that move.

Moreover, while cash bonuses and most other forms of compensation are taxable when you receive them, stock options defer taxes until you exercise them. Before you exercise your options, their built-in value is subject to pre-tax growth—which can be significant.

For all of these reasons, the panelists in the myStockOptions webinar agreed: often no advantage exists in exercising nonqualified stock options in a public company soon after vesting, paying taxes on the spread, and then holding the shares for long-term capital gains (unless special circumstances occur, such as job termination). As long as the stock price continues to rise, thus increasing the spread over the exercise price, the leveraged value of the options grows without any tax hit, and your net after-tax proceeds will be larger.

In other words, the “Tao of Stock Options” might be the paradox that doing nothing for as long as possible could confer the greatest value.

Opportunity Cost

Consider also the opportunity cost of exercising and holding NQSOs. Financial advisors often liken stock options to an interest-free loan. “An option’s value is enhanced by the ability to use the capital that would otherwise be invested in the stock for some other investment,” said webinar panelist Bill Dillhoefer, CEO of Net Worth Strategies (creator of the StockOpter decision-making tool for employee stock options).

For example, he explained that if your options have a 10-year term and the company’s stock price keeps rising, the options have growing tax-deferred value before you have spent any money on them. Funds that you would otherwise put into buying the company’s stock can be used for other investments, then directed later into the option exercise at a strategic moment for larger gains.

Bill’s approach, which he detailed in the webinar, applies various ratios that consider special factors to calculate the optimum time to exercise options. For instance, when the stock price is much higher than the exercise price, these options with a big spread have less leverage and smaller upside from stock-price increases. These are the NQSOs that you might want to exercise and then immediately sell the shares.

2. Risk Versus Reward

As always with investing, stock options involve risks as well as rewards. If the stock price plummets below your exercise price, the value of the options vanishes (i.e. they go “underwater”). Decisions about when to exercise must therefore factor in the outlook for the company’s stock price.

The webinar panelists also discussed the risk of overconcentration, i.e. having too much of your net worth tied up in the stock of just one company. A single stock price can quickly fall. A diversified stock portfolio helps to mitigate that risk. When you calculate your concentration level, you should include any vested stock options you have. That can give you yet another reason to wait on exercising your options until you have a solid post-exercise plan that includes selling shares for diversification.

How can you balance the risks and the rewards? “Fundamentally, it is useful to base decisions with any type of equity award primarily on financial goals, timeframes for those goals, and the investment risk along the way,” explained David Marsh, Financial Planning Case Manager with Ameriprise Financial.

“Create perspective,” asserted his fellow webinar panelist Megan Gorman, a financial advisor, founder of Chequers Financial Management, and a Forbes senior contributor. “If you show the best-case scenario, also show the worst.”

To lessen concentration risk and promote diversification, a strategy formulated with a financial advisor should also extend well beyond exercise, said Megan. “Have a strategy on selling stock and where the proceeds are going to be reallocated to.” When you have a strategy, one way to document it (and provide some protection from accidental insider trading) is with a Rule 10b5-1 trading plan. She uses these for her executive clients.

3. Taxes

All of the webinar panelists agree that taxes should not be the principal driver of decisions. “While taxes are key factors, it’s dangerous to base decisions principally on tax aspects and neglect coordination with goals and investment risk,” warned David Marsh. In other words, chimed in Megan Gorman, the tax tail should not wag the option dog.

Nevertheless, Megan continued, it is important to model tax scenarios for your stock options and be prepared. “To build wealth, you have to deal with tax consequences.”

She added that for NQSOs you should “be prepared for your company’s tax withholding at exercise to not be sufficient to cover tax bill.” The IRS default statutory withholding rate of 22% for supplemental income, such as the spread at option exercise or restricted stock unit (RSU) vesting, is often lower than your actual income-tax rate. While the withholding rate jumps to 37% for supplemental wage income in excess of $1 million during the calendar year, employees between those extremes will have to plan how to pay the taxes not covered by the 22% default rate. The shortfall can be paid in quarterly estimated taxes based on the amount owed, among other methods.

4. Understand The Stock Plan Documents

One of the biggest mistakes with stock options is failing to read the stock plan documents and not fully understanding the terms of the grant, according to the experts in the webinar. “Grant info needs to be organized, saved, and updated to provide ongoing guidance,” cautioned Bill Dillhoefer.

Chief among the option terms to know are the vesting provisions and what would happen upon job termination, which usually triggers a very short window for option exercise before the grant term expires. “It’s crucial to clarify equity awards’ terms for vesting and at separation of service,” stated David Marsh. “Realize they may not all be the same.”

He also noted that many optionholders neglect to designate a beneficiary for vested stock options in case of death. “This is usually allowed in the plan, but often employees are unaware of that.”

5. Seek Help From A Qualified Advisor

“Stock options are complex employee benefits,” asserted Megan Gorman during her segment of the webinar. “Complex benefits require us to move slowly and think through issues.”

She implores optionholders to obtain guidance from a financial advisor and tax experts with experience in stock options, and to avoid relying on tips from co-workers. “Exercise strategies are incredibly personal,” Megan emphasized. “For your own unique situation, you may need to do very different things than your colleagues.” Bill Dillhoefer echoed this sentiment, observing that applying advice from “water-cooler” chats with co-workers about stock options can lead to mistakes.

More Insights Into Option Exercise Strategies

For many more insights about option exercise strategies, see financial-planning articles by expert contributors at myStockOptions.com. In addition, the webinar where Bill, David, and Megan presented advanced planning strategies and case studies, involving both NQSOs and ISOs in public and private companies (Stock Option Exercise Strategies: Advanced Bootcamp), is available on demand at the myStockOptions Webinar Channel (more details on that below).

myStockOptions Webinar Channel

See the myStockOptions webinar channel to register for our upcoming webinars and purchase our past webinars on demand in streaming format. On-demand webinars include:

Restricted Stock & RSU Financial Planning: Advanced Bootcamp (100 mins). This lively webinar features insights from a panel of three leading financial advisors, including case studies, to provide practical info, guidance, and expertise for restricted stock/RSUs in both public and private companies. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Stock Option Exercise Strategies: Advanced Bootcamp (100 mins). Stock options can offer great leverage, but it must be wielded wisely. It is crucial to have a strategic plan for stock option exercises. This webinar features compelling insights from a panel of three experts in option exercise strategies. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Stock Compensation Bootcamp For Financial Advisors (100 mins). Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Strategies For Concentrated Positions In Company Stock (100 mins). Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain the wide range of strategies and solutions available for preventing losses and meeting goals. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Know Your Options: Comparing NQSOs And ISOs

Stock options became famous during the 1990s. It was then that many companies, even those beyond the tech industry, started to make broad-based option grants to rank-and-file employees, not just to executives, as a strategy to lure top talent. Even Seinfeld took notice. "So," Elaine says to Jerry and George in "The Money" (1997), "you understand how my Peterman stock options are gonna work?" While George (of course) feels only petty envy that she makes more than he does, it is a very good question. Before you exercise employee stock options and do any financial planning with them, you need to understand which type of options you have and their tax treatment.

While since the 1990s many companies have come to favor other equity grants, such as restricted stock units (RSUs) and performance shares, stock options remain a major form of equity compensation. Companies can grant two types: nonqualified stock options (NQSOs), the more common variety, and incentive stock options (ISOs), which offer some tax benefits but also raise the complexities of the alternative minimum tax (AMT).

Which Type Of Options Do You Have?

Before exploring the differences between NQSOs and ISOs, you must check your grant agreement and know which type of options you have. Many companies now have omnibus stock plans in which they are authorized to grant not only both types of stock options but also restricted stock, RSUs, performance shares, and stock appreciation rights (see, for example, Uber’s 2019 equity incentive plan). This is why you need to look at your specific grant to be sure of the award type you are receiving. If it’s still not clear to you, then ask the stock plan administrator or person at your company in charge of managing the employee stock option plan.

Nonqualified Stock Options

A nonqualified stock option (NQSO) is a type of stock option that does not qualify for special favorable tax treatment under the US Internal Revenue Code. Thus the word nonqualified applies to the tax treatment (not to eligibility or any other consideration). A few basic NQSO facts:

• NQSOs are the most common form of stock option and may be granted to employees, officers, directors, contractors, and consultants.
• Unexercised NQSOs can be transferred to others, such as upon divorce or gifting.
• There is no tax-code limit on the total number or value of NQSOs that can be granted.

You pay taxes when you exercise NQSOs. For tax purposes, the exercise spread is compensation income and is therefore reported on your IRS Form W-2 for the calendar year of exercise.

Example: Your NQSOs have an exercise price of $10 per share.

• You exercise them when the stock price is $12 per share.
• You have a $2 spread ($12 – $10) and thus $2 per share in ordinary income.
• You sell the stock at $16 per share, giving you $4 per share in capital gains ($16 –$12 tax basis). Whether the gain is long-term or short-term depends on your holding period after exercise.

When you exercise NQSOs, your company will withhold taxes: federal income tax, Social Security (up to the yearly limit), Medicare, and state taxes (if applicable). This withholding appears on your Form W-2 for that calendar year.

When you sell the shares, whether immediately at exercise or after a holding period, you need to report the stock sale on Form 8949 and Schedule D of your IRS Form 1040 tax return. For a detailed explanation of the tax rules, see the related sections of the Tax Center at myStockOptions.com.

Incentive Stock Options

Incentive stock options (ISOs) qualify for special tax treatment under the Internal Revenue Code and are not subject to Social Security, Medicare, or withholding taxes. However, to qualify they must meet criteria specified under the tax code:

• ISOs can be granted only to employees, not to directors, consultants, or contractors.
• There is a $100,000 limit on the aggregate grant value of ISOs that may first become exercisable (i.e. vest) in any calendar year.
• For an employee to retain the special ISO tax benefits after leaving the company, the ISOs must be exercised within three months after the date of employment termination (longer periods apply for disability and death).
• Unlike NQSOs, ISOs cannot be transferred to others (e.g. upon divorce or by gifting).

ISO Holding-Period Rules: Benefits But Risks

After you exercise ISOs, if you hold the acquired shares for at least two years from the date of grant and one year from the date of exercise, you incur favorable long-term capital gains tax (rather than ordinary income tax) on all appreciation over the exercise price. Meeting the holding-period requirements of an ISO can result in substantially lower taxes.

Example: Your exercise price is $10, i.e. the stock price at grant. You exercise when then market price is $15.

Holding period	Sale price	Taxable income
Less than 1 year from exercise*	$17	$5 ordinary income (reported on W-2) + $2 short-term gain
1+ year from exercise, 2+ years from grant	$17	$7 long-term capital gain, no ordinary income

*ISO taxation depends on: (1) when shares are sold; (2) the sale price relative to the exercise price and the market price at exercise.

However, the exercise spread on shares acquired from ISOs and held beyond the calendar year of exercise can subject you to the alternative minimum tax (AMT) and additional tax-return reporting (e.g. Form 6251). This can be problematic if you are hit with the AMT on paper gains but the company's stock price then plummets, leaving you with a big tax bill on income that has evaporated.

Alert: If you have been granted ISOs, you must understand how the AMT can affect you. You should do an AMT calculation whenever you exercise ISOs and hold the shares.

Summary

The table below, from myStockOptions.com, summarizes and compares selected major traits of NQSOs and ISOs.

Option type	Eligibility	Event that triggers taxes	Taxes	Withholding?	Tax at sale
NQSOs	Company employees, executives, directors, contractors, and consultants	Exercise	Ordinary income tax, Social Security, and Medicare on the exercise spread	Yes, at exercise	Capital gains tax
ISOs	Only company employees and executives	Sale, unless AMT incurred	Ordinary income tax, AMT, or none*	No	Capital gains tax*

*ISO taxation depends on: (1) when shares are sold; (2) the sale price relative to the exercise price and the market price at exercise.

Further Resources

For more knowledge and financial-planning insights on these different types of stock options, see the NQSO and ISO sections of myStockOptions.com. To discover what your gains would be after exercising options and selling the stock, try the site's Quick-Take Calculator for Stock Options and other tools. For potential differences in these grants at private companies, see the section Pre-IPO at myStockOptions.com.

Tax Reporting For Stock Compensation: Understanding Form W-2, Form 3922, And Form 3921

The end of January is in sight. Along with snowflakes, personal tax-return documents are in the air—or rather, hopefully either in your safe possession or on their way to you. When you have stock compensation, tax-return documents and the information they contain can be confusing and hard to decipher.

Making Sense Of Form W-2 When Stock Compensation Is Reported

Employees who had income from stock compensation or an employee stock purchase plan in 2015 must understand where that income is reported on Form W-2 so that they can complete their tax returns properly. In the Tax Center at myStockOptions.com, we have a section of FAQs about Form W-2 reporting for stock compensation. Each one includes an annotated diagram of Form W-2 that clearly interprets this sometimes cryptic document.

Restricted Stock, RSUs, Performance Shares

The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types. Income is included in the following places:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (to income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)

To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs, including annotated diagrams, in the Tax Center.

Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.

Stock Options

If you exercised nonqualified stock options last year, the income you recognized at exercise will be reported on your W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)
• Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights, with the exception that Code V is not used.)

With incentive stock options, the spread value appears on the W-2 only when you make what is technically called a disqualifying disposition, i.e. when you sell or gift the stock before you have met the required holding periods of one year from exercise and two years from grant. In that case, the income appears on the W-2 as compensation income. Unlike with NQSOs, your company does not withhold federal taxes on ISO exercises and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions. For the details of W-2 reporting for ISOs in this situation, see our FAQ on this topic in the Tax Center.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions.com.

Form 3922 For ESPPs And Form 3921 For ISOs

Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2015, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic).

Alert: In 2016, the amount of the IRS penalty doubled for companies that file information returns late or fail to distribute the employee statements.

For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

While Forms 3922 and 3921 may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, they mean that accurate and timely tax-return reporting is more important than ever.

Annotated Diagrams Of Forms 3922 And 3921

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. You will find this content in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers.

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

Sell Shares In 2015? The Fun Is Just Beginning

If you sold shares from stock compensation or an ESPP last year, you will need guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting. These FAQs clearly explain how the information on Forms W-2, 3922, and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return.

Resources For Stock Plan Participants And Companies

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns.

The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or [email protected]).

Making Sense Of IRS Form 3922 (ESPPs) And IRS Form 3921 (ISOs)

Whatever the groundhog prognosticates about the remaining winter, we know for sure that tax-return season is coming. As this blog recently stated, employees should by now have received Form W-2 from their companies. If you had income from stock compensation or an employee stock purchase plan in 2014, you must understand where that income is reported on Form W-2 so that you can complete your tax return properly (for help, see our FAQs with annotated W-2 diagrams).

But Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2014, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic). For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

The Uses Of Forms 3922 And 3921

While Forms 3922 and 3921 may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, they mean that accurate and timely tax-return reporting is more important than ever.

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. This content is available in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers. Our articles and FAQs are also individually available for licensing (for details, please contact us at [email protected]).

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

If last year you sold shares acquired from an ESPP or from ISOs, you will want to see the FAQs of the section Reporting Company Stock Sales in the Tax Center at myStockOptions.com. These FAQs clearly explain how the information on Forms 3922 and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return. The FAQs also have helpfully annotated diagrams of Form 8949 and Schedule D.

Making Sense Of IRS Form 3922 For ESPPs And IRS Form 3921 For ISOs

Last year, did you buy shares in your company's employee stock purchase plan (ESPP) or exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic). For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

While these forms may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, accurate and timely tax-return reporting is more important than ever.

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ just on Form 3922 for ESPPs and an article and FAQ just on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. This content is available in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers. Our articles and FAQs are also individually available for licensing (for details, please contact us at [email protected]).

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

If last year you sold shares acquired from an ESPP or from ISOs, you will want to see the FAQs of the section Reporting Company Stock Sales in the Tax Center at myStockOptions.com. These FAQs clearly explain how the information on Forms 3922 and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return. The FAQs also have helpfully annotated diagrams of Form 8949 and Schedule D.

The Dreaded AMT: How To Find Out Whether Your ISO Exercise Will Trigger The Alternative Minimum Tax

Generally, for each tax year you pay either your regular-tax liability or your alternative minimum tax (AMT) liability, whichever is higher. For most people, the regular-tax liability always turns out to be greater, so the AMT never comes into play. Unfortunately, however, the AMT is hitting a growing number of mere middle-income taxpayers, including people who exercise incentive stock options (ISOs) and hold the shares. This risk is especially pertinent for those who live in high-tax states, itemize tax deductions, and/or have significant personal exemptions, particularly if they exercise and hold ISOs with a big spread. To help your AMT planning, a recently updated FAQ at myStockOptions.com presents a table showing AMT trigger points across a wide range of yearly incomes. For example, if in 2013 you have regular taxable income of $200,000, all it takes to trigger the AMT is a positive adjustment (e.g. ISO spread at exercise) of only $9,163 for joint filers or $8,090 for a single filer.

Over the past several years, Congress has had to take special measures to restrain the spread of the AMT and thus keep it from unfairly taxing millions of people (see the related FAQ on recent developments). In the American Taxpayer Relief Act of 2012, Congress made three major changes in the AMT calculation but did not eliminate the AMT (see the FAQ with details of the changes).

If you are in danger of triggering the AMT, you may be interested in our FAQ that explains various ways to minimize AMT exposure. One strategy involves year-end or year-beginning exercise. Some advisors suggest exercising ISOs at the end of each year, when you can safely estimate whether you will owe AMT for that year. The idea here is to exercise ISOs up to a point at which the aggregate ISO spread will not trigger the application of AMT (i.e. to equalize your AMT and regular-tax liability). For more on this strategy, see a related FAQ on myStockOptions.com. Others advise employees to exercise ISOs in the first quarter of a year: if the stock price drops you can sell the ISO shares later during the same calendar year and avoid paying AMT on paper profits. (See a related FAQ with examples of tax treatments that may apply after a disqualifying disposition in the same year as exercise.) Alternatively, if the stock price rises, you hold the shares. By tax-return time the following year, you will have satisfied the ISO holding periods, so all your gain over the exercise price will be long-term capital gain. When you file your tax return before April of the next year, should you then sell some of the ISO stock to pay AMT, you will at least receive long-term capital gains tax treatment on the appreciation of the sold shares.

The Alternative Minimum Tax Calculation: Major Changes Under New Tax Law

While the American Taxpayer Relief Act (ATRA) did not end the alternative minimum tax (AMT), it has three provisions with a major impact on the AMT calculation. These are important for high-income taxpayers—particularly those who exercise incentive stock options.

1. ATRA set the AMT income (AMTI) exemption amounts for 2012 at $50,600 for single filers and $78,750 for married joint filers. It also permanently indexed the AMT income exemption amounts for inflation in future years (this had never been done before). From 2013 onward, the AMT income exemption amounts will be automatically raised slightly each year in accordance with inflation. The exemption amounts for 2013 are $51,900 and $80,800, according to IRS Rev. Proc. 2013-15 (see page 8).
2. The law indexed the income thresholds where the phaseout of the AMT income exemption begins (the first time this has ever been indexed). AMTI exemption amounts are phased out by 25 cents for every dollar of AMTI over specified exemptions. In 2013, for married joint filers the phaseout range starts at $153,900 of AMT income; for single filers, the phaseout starts at $115,400 of AMT income. Therefore, in 2013 the exemption is fully phased out when AMTI is equal to or exceeds $477,100 for joint filers and $323,000 for single filers.
3. Achieving yet another first, ATRA also indexed the income threshold where the 26% AMT rate ends and the 28% AMT rate begins. In 2013, for unmarried single filers and married joint filers alike, this threshold is $179,500; for married people filing separate returns, the threshold is $89,750.

The permanent indexing of the AMT income exemption amounts for inflation was an important development. Before ATRA, Congress had enacted temporary AMT relief every year for several years as a stopgap measure to keep middle-income people from being unfairly hit by the AMT. This worked as an interim measure, but the annual process in Congress for passing each patch was tortuous, politically charged, and full of uncertainty. Eventually, there was a consensus that the matter was too important to be left to last-minute legislative activity every year. Without annual increases to control the spread of the AMT, the AMT exemption amounts would have returned to the low levels of 2000 ($45,000 for joint filers and $33,750 for singles), imposing the AMT on a vast population of middle-income taxpayers it was never intended to tax. By essentially automating the annual AMT patch, the inflation-indexing of the exemptions obviated the former annual need for Congressional action and eliminated the related yearly uncertainty.

Even if, after these three changes, you are still stuck with the AMT, there are planning techniques that can help. See FAQs on myStockOptions.com about how to minimize AMT liability, or how to manage it if you know you must pay it.

Acquiring A Taste For The Alternative Minimum Tax: Planning Opportunities In The AMT Sweet Spot

Calculating and limiting the alternative minimum tax (AMT) in connection with incentive stock options (ISOs) is complex and can be confusing. On myStockOptions.com, the basic facts and issues of the AMT and ISOs are presented in our perennially popular article Dr. Strange Tax, Or: How I Learned To Stop Worrying And Love The AMT. (Film buffs will surely recognize the allusion.) Learning to love the hated AMT: how could we ever top that feat of tax-planning bravado?

Well, we have. This week, we published an article on ISO tax planning that shows how the AMT can become not just something you learn to live with but actually a sophisticated acquired taste. Indeed, the authors even go so far as to compare the AMT to "an upscale eating club with a high fee to get in the door—but once you're inside, the meals are tasty and cheap." In The Alternative Minimum Tax Sweet Spot: Planning Opportunities, financial advisors Tom Davison and William Whitaker take a look at an advanced tax-planning technique that can turn the top AMT rate of 28% to your advantage if you are in a high tax bracket for ordinary income but get socked with the AMT after an ISO exercise-and-hold. Intrigued? We were too. Read the article to find out the workings of the AMT Sweet Spot.

For an appetizer (or perhaps dessert), you may also want to peruse our other content on the alternative minimum tax. On myStockOptions.com, you can find plenty of articles and FAQs on the AMT, running through topics from the basic to the complex, in the sections ISOs: AMT and ISOs: AMT Advanced.

Got Eight Minutes? Get The Facts On The New IRS Forms & Reporting For Stock Sales

If there's a way to make learning about tax forms fun, we'll try it. In the Tax Center at myStockOptions.com, we just published an animated presentation on the expanded IRS Form 1099-B, the new IRS Form 8949, and the revised Schedule D. It's a painless way to learn these important developments and prevent expensive mistakes on tax returns during the imminent tax season.

In a concise, engaging overview, our editor-in-chief Bruce Brumberg will inform you about:

• the expanded reporting on Form 1099-B, and why the reported cost basis may be wrong or omitted
• how to figure out the right cost basis for your stock sales
• the new Form 8949 and how to report stock sales on it
• how to interpret Form 1099-B when completing Form 8949
• what to do when the cost basis in Box 3 of Form 1099-B is too low or not given
• totaling the reported stock sales on the revised Schedule D

Need further information? There's plenty more where that came from. A new article and FAQ at myStockOptions.com give full coverage of these tax-return topics. Additionally, our special section Reporting Company Stock Sales presents FAQs with annotated diagrams of Form 8949 and Schedule D. Each FAQ explains and illustrates a different reporting situation involving stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, or stock appreciation rights. Clear instructions and diagrams show how to complete the forms, whether the cost-basis information on Form 1099-B is accurate, too low, or omitted.

Stock Comp Income & Withholding On Your Form W-2? Time For Our FAQs & Diagrams

Form W-2 is in the air—or, hopefully, safely in your mailbox or desk by now. If you had income from stock compensation or an employee stock purchase plan in 2011, you need to understand where that income is reported on the W-2 so that you can complete your tax return properly. In the award-winning Tax Center at myStockOptions.com, we have a series of FAQs dedicated to interpreting this sometimes cryptic document. These FAQs include annotated diagrams of Form W-2 that clearly show you around the form.

Stock Options

If you exercised nonqualified stock options last year, the income you recognized at exercise will be reported on your W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)
• Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights, with the exception that Code V is not used.)

With incentive stock options, the spread value appears on the W-2 only when you make what is technically called a disqualifying disposition, i.e. when you sell or gift the stock before you have met the required holding periods of one year from exercise and two years from grant. In that case the income appears on the W-2 as compensation income. Unlike with NQSOs, your company does not withhold federal taxes on ISO exercises and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions. For the details of W-2 reporting for ISOs in this situation, see our FAQ on this topic in the Tax Center.

Restricted Stock, RSUs, Performance Shares

The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types. Income appear in the following places:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (to income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)

To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs, including annotated diagrams, in the Tax Center.

Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions.com.

Sell Shares In 2011? The Fun Ain't Over Yet

If you sold shares from stock compensation or an ESPP last year, you'll need more guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting.

Resources For Stock Plan Professionals

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns. The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or [email protected]).

Tax Return Time Is Over, But Estimated Taxes Are Never Out Of Season

Now that tax return season is over (hope it was good for you), it's time to look at the tax year ahead. Federal tax law requires you to pay at least 90% of your income tax liability during the year through either withholding or quarterly estimated tax payments (with a few safe harbor exceptions). If an option exercise or restricted stock/RSU vesting increases your income so that the standard withholding percentage is insufficient, you may need to pay estimated taxes to make up the difference and avoid paying penalties and interest. (The standard withholding percentage for federal tax on supplemental income is 25%, but the percentage is 35% for amounts of supplemental income over $1 million during a calendar year.)

You make quarterly estimated tax payments by the 15th (or next business day) of April, June, and September in the year of exercise/vesting and January of the following year. The deadline for the first quarter of 2011 recently passed on April 18. The next due dates for the 2011 tax year are June 15 and September 15 of 2011 and January 17 of 2012. One safe harbor approach is to make estimated payments, along with any salary and supplemental income withholding, that equal at least 100% of the previous year's total tax. For people with adjusted gross incomes (AGI) of more than $150,000 (or $75,000 if married and filing separately), the safe harbor level is 110% of the prior year's tax.

If you must pay estimated taxes, one small strategy is to exercise stock options just after the start of an estimated-tax period rather than just before it ends. See myStockOptions.com for other strategies involving estimated tax payments, for the safe harbors that let you avoid penalties, and for details on estimated taxes with NQSOs, ISOs, restricted stock/RSUs, and stock appreciation rights.

IRS Form 3922 For ESPPs And Form 3921 For ISOs: What They Are And What You Need To Know About Them

For ESPP purchases or ISO exercises during 2010, employees should by now have received the new IRS Form 3922 for ESPPs and Form 3921 for ISOs, or a substitute form that aggregates the same information in one place. Companies must file the forms electronically with the IRS by the end of March. (Those with fewer than 250 filings were allowed to make paper submissions before the end of February.)

For those who already understand ESPP and ISO taxation, these forms add nothing new, and they don't change tax-return reporting or timing. However, employees, their CPAs, or anyone preparing a tax return must know the following about the forms:

• The IRS now knows more about ESPP purchases and ISO exercises than it used to, and its computers can quickly match inconsistencies between these forms and your tax return.
• With Form 3922 for ESPPs, for example, the IRS now knows your tax basis and the calculation of ordinary income you owe when you eventually sell the ESPP shares in a qualifying disposition. The failure to report this ordinary income on your tax return is a common error, and now the IRS will have the information to catch the mistake.
• With Form 3921 for ISOs, the IRS now has the information it needs to confirm your calculation for triggering the alternative minimum tax (AMT) when you exercise and hold the ISO stock, and it knows the tax basis at the sale of ISO shares. The ISO exercise spread is not reported on Form W-2 unless you sell the stock in a disqualifying disposition, and this new form therefore provides the IRS with information it lacked before.

Employees should not file these forms with the IRS. They should save the forms to help with their tax-return reporting after they eventually sell the shares.

myStockOptions.com has published an article and FAQ exclusively dedicated to Form 3922 for ESPPs, and another article and FAQ just on Form 3921 for ISOs. These include annotated examples of the forms that "translate" IRS jargon into understandable language and show how the information applies to tax reporting.