Tuesday, July 26, 2005
Kevin D. Sigler (University of North Carolina-Wilmington) has published Stock Options: Taxes and Tax Strategies for Employees, 108 Tax Notes 427 (July 25, 2005), also available on the Tax Analysts web site as Doc 2005-15180, 2005 TNT 138-27. Here is the abstract:
Qualified incentive stock options (ISOs) and nonqualified stock options are used by corporations as types of equity compensation for employees. Qualified options provide tax benefits but have complicated tax consequences. When compared to qualified ISOs, nonqualified options have the disadvantage that taxable income must be reported at the time nonqualified options are exercised, and the income is taxed as ordinary income and not as a long-term capital gain. Qualified ISOs avoid that disadvantage because there is no income to report at the time the qualified option is exercised unless the stock is sold at the same time it is exercised. And qualified options can qualify for long-term capital gain treatment for the entire appreciation above the exercise price if they are held for a specific period of time.
But the tax advantages from qualified incentive stock options may be offset by the alternative minimum tax. This is a complicated calculation that may cause the taxpayer to pay tax at the time the qualified options are exercised and may also negate the long-term capital gain rate on the sale of both qualified and nonqualified option stock. Also, the $100,000 restriction on the grant value of qualified option stock may negate the special tax treatment it has above the $100,000 limit. This article discusses both qualified and nonqualified options, reviews how they are taxed, and offers strategies to minimize taxes on both types of options.