Incentive Stock Options Advisory

Are you sitting on your stock options? If you have unexercised stock options, you may want to look further into exercising them before the end of the year.

Why? Tax rates are going higher, not lower! Long term capital gains rates will more than likely INCREASE in 2011 (the Bush tax cuts expire in 2010). If your options are ISO's you can lock-in the lower long-term capital gains rates then if you exercise them into 2010 or later.

Check your benefit plan to see if the stock options were issued under an Incentive Stock Option plan or ISO. If they are ISO's and you hold the stock for one year after the date of the exercise, then the difference between the grant price and the market price on the date of the sale, is taxed as Capital Gain income and NOT ordinary income. Long term capital gain rates are going up in 2011, so you've got to exercise the option, hold the stock, and then sell the stock all between now and the end of 2010.

How much are we actually talking about? If you exercise the option and sell the stock, the difference between what you pay for the option and the sales price is taxed as Ordinary Income. If you hold the stock for one year, the same difference is taxed at capital gains rates. The difference could be as much as 20% of the total value!

How do you fund this strategy?

- Ask your broker about a margin account;
- Sell a portion of the stock to pay for the entire option price so you can hold the remainder of the grant for one year.

Remember that if you exercise the option and immediately sell the stock you will recognize some ordinary income on the exercise so be prepared for the tax impact.

Want to NEVER pay tax on the stock?

- After you exercise the option, fund a 529 plan for your children or grandchildren and the gain on the stock sale will not be taxed if the funds are used for qualified education expense!
- Give the stock away to a qualified charity and get the fair market value of the stock as a charitable contribution without having to have paid tax on the gain!

Happy New Year!

Bill K.

R. William E. Kruse III