Why a Mid-Year Review Matters:
Stock-based compensation events—such as vesting of restricted stock units (RSUs), exercising stock options, or selling shares—can create significant and sometimes unexpected tax liabilities. Proactive planning can help avoid surprises, save taxes, avoid penalties, and help build your wealth.
Action Steps:
- Review Upcoming Vesting and Exercise Dates:
Identify any RSUs, stock options, or performance shares scheduled to vest or become exercisable in the second half of the year. Understand the tax implications of each event. - Estimate Tax Withholding Needs:
Income from stock compensation is generally subject to withholding, but the default withholding rate may be insufficient, especially for higher earners. Review your year-to-date compensation and projected income to determine if additional withholding or estimated tax payments are needed. - Plan for Stock Sales:
If you plan to sell shares acquired through your employer, consider the timing and potential capital gains tax. Holding shares for more than one year after exercise or vesting may qualify you for long-term capital gains rates. - Understand Special Tax Rules:
For incentive stock options (ISOs), be aware of alternative minimum tax (AMT) implications. For nonqualified stock options (NSOs), and RSUs, ordinary income is recognized at exercise or vesting, respectively. - Coordinate with Other Income:
Stock compensation can push you into a higher tax bracket or trigger additional taxes, such as the net investment income tax, or reduce certain tax credits. Review your overall income picture to anticipate these effects.
Staying on top of your finances for employees with stock-based compensation is crucial to keeping taxes low and improving your wealth and financial picture. But it should happen throughout the year, not just at year end. By understanding your opportunities and obligations, keeping accurate records, and planning ahead, you can avoid penalties and make the most of available tax benefits.
Contact us for more information about our services.
Flatiron Advisors is a virtual tax and accounting firm offering proactive tax planning strategies for business owners, rental real estate owners, and employees receiving equity-based compensation. We offer holistic, fee-based financial planning and investment management services through Flatiron Wealth Advisors, LLC.
