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ISO Stock Options tax question

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seplant

Junior Member
I have ISO options from my employer that I am able to exercise, and I would like to do a cashless exchange, but Smith Barney, who administers the options, will not withhold taxes on my exchange because they are not set up by my employer to do so for this type of stock. Our company's stock has gone up considerably since I was awarded these options, so they are now worth about $50K. If I cash in my options now and no tax is withheld, I will owe $14K come tax time. My question is this: Will this raise eyebrows at the IRS in the Spring if I send in a $14K tax payment? What other choice do I have?
 


LdiJ

Senior Member
I have ISO options from my employer that I am able to exercise, and I would like to do a cashless exchange, but Smith Barney, who administers the options, will not withhold taxes on my exchange because they are not set up by my employer to do so for this type of stock. Our company's stock has gone up considerably since I was awarded these options, so they are now worth about $50K. If I cash in my options now and no tax is withheld, I will owe $14K come tax time. My question is this: Will this raise eyebrows at the IRS in the Spring if I send in a $14K tax payment? What other choice do I have?
Why would it raise any eyebrows at the IRS? The only assumption that would be made is that you had a taxable event with no withholding, and needed/wanted to make an estimated payment.

Or did I misunderstand you? Are you wanting to send in the payment with your tax return?
That may not be a problem either. Here is a link to some information on when estimated tax payments are required:

http://www.irs.gov/faqs/faq9-3.html
 

abezon

Senior Member
A cashless exercise usually means that all options are exercised & the broker sells just enough shares to cover the ISO stock basis & mandatory tax payments. If your ISO price were $1/share & you exercised 1,000 options, you'd need to pay $1,000 for the stock. The broker would sell $1,000 worth of stock, but you'd continue to own the remainder.

The advantage of the cashless exercise is that you avoid a huge regular tax hit. Your income is only the $1,000 from the stock sale. This income shows up in your W-2 as wages & is subject to the regular payroll taxes. The unsold shares are not taxed. Also, if you hold any shares for more than a year, when you sell, those shares generate capital gain/loss. This means you avoid paying ordinary income tax rates & don't have to pay social security/medicare taxes on the gain.

The disadvantage is that you might trigger AMT liability. Without knowing your specific circumstances, we can't make any guess as to whether you'd face a big AMT tax hit or not from exercising the options & holding them.

I strongly suggest you consult a financial advisor and/or tax pro with experience handling ISOs. You may end up waiting until January to exercise the options, selling the minimum, or you may exercise & sell all ISOs, in which case it may be better to do it in 2007.
 

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