Irina has a lot on her mind as she is thinking about exercising her ISOs. By day she runs the human resources group for an international travel company. Then she heads to her family: her husband Vlad and four daughters, two in college and twins in high school. She gave little thought to taxes when she exercised an ISO grant last year and decided to hold the stock for future appreciation. When she was hit by the Alternative Minimum Tax on the in-the-money amount, she was shocked. That’s when she decided to come up to speed on the tax treatment of ISOs, before she sells the shares (after holding for one year and a day).
There’s two parts to the equation: tax planning and taxation. She met with their accountant to figure out how to minimize their tax liability.
Irina’s accountant explained how she and Vlad may be eligible for the AMT tax-credit carry forward, after having paid AMT on an ISO exercise, which generates a credit for future years.
Suppose Irina has $25,000 of AMT credit available from 2016. In 2017, her regular tax liability – including ordinary income and capital gains -- is $87,000. By way of example from her accountant, the tax calculated under the AMT rules is $82,000. She won’t have to pay AMT because her regular tax is higher than the tax calculated under AMT rules. In addition, she will claim an approximate $5,000 in AMT credit, reducing her regular tax to $82,000. (In addition, she is expected to still have $20,000 in unused AMT credit to apply in future years).
With taxation explained, Irina finds needs advice on whether or not to sell, and of course, she would like to have a proactive strategy to maximize this as well as future ISO transactions. In addition, her costly experience in 2016 has her questioning whether ISOs are the best use of funds for education funding or whether other funds should be used first.
Her husband Vlad had a bad experience working with a financial advisor. Irina is taking the lead this time, making sure to engage her accountant and a fee-only fiduciary, who is independent, objective and a CFP®.
*The name, likeness, and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.
Chuck Steege is President of SFG Wealth Planning Services, Inc., SFG Investment Advisors, Inc. (SFG), a fee-only financial planning firm. Founded in 1993, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.Tagged: chuck steege, sfg wealth planning services, certified financial planner, performance shares, tax consultants, alternative minimum tax, tax treatment of isos
Posted In: Executive Compensation, Incentive, Planning