RSUs are taxed as ordinary income when they vest. Non-qualified stock options (NSOs) are taxed as ordinary income on the spread when you exercise. Incentive stock options (ISOs) are not taxed as regular income at exercise but may trigger alternative minimum tax, and qualify for long-term capital gains if holding rules are met. An equity compensation financial advisor in Chattanooga can map out the timing.
When RSUs vest, the market value of the shares is taxed as ordinary wages. Employers usually withhold by selling or holding back shares, but the default withholding rate can be lower than your actual bracket, leaving a balance due. After vesting, any further gain or loss is a capital gain or loss.
At exercise, the spread between the market price and your strike price is ordinary income. Later growth after exercise is taxed as capital gain when you sell.
No regular income tax at exercise, but the spread counts for alternative minimum tax. If you hold shares at least two years from grant and one year from exercise, the full gain can be long-term capital gain. Selling early creates a disqualifying disposition taxed partly as ordinary income.
An employee has 1,000 RSUs vest when the stock is $50. That is $50,000 of wage income. If the employer withholds federal tax at a flat supplemental rate but the employee's actual bracket is higher, the difference will be due at tax time. Planning estimated payments or extra withholding ahead of the vest prevents a surprise.
An employee exercises 2,000 ISOs with a $10 strike when the stock is $40. There is no regular income tax at exercise, but the $60,000 spread is added for AMT purposes. Exercising in smaller amounts across several years, sized to stay below the AMT trigger, can reduce or avoid AMT.
Tennessee does not tax wages or capital gains for individuals, so equity compensation planning for Tennessee residents focuses on federal tax. Employees who move into or out of Tennessee while holding unvested awards may face allocation rules in other states.
Employers often withhold at a flat supplemental rate that can be lower than your actual bracket, leaving extra tax due.
Selling ISO shares before meeting the two-year-from-grant and one-year-from-exercise holding periods, which converts part of the gain to ordinary income.
Concentration adds risk. Many plans set a schedule to diversify while managing taxes.
Have options or RSUs? Work with our equity compensation financial advisor in Chattanooga before your next vest or exercise.
This article is for educational purposes only and is not individualized investment, tax or legal advice. Talk with a qualified professional about your specific situation.
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