LEARN | Incentive Stock Options: Incentive Compensation

Why Ask This?

ISOs are employer stock options that qualify for a deferral of any tax payment until the acquired shares are sold. ISOs require employees to pay for the shares acquired and vest over time.

Why Ask This?

Your client or prospect can choose when to exercise vested options and how many to exercise. A maximum of $100,000 (grant value) of ISOs can vest in any calendar year, with any awarded options above this amount converting automatically to nonqualified stock options.

Why Ask This?

ISOs are not taxed when they are awarded or exercised. The cost basis on the shares is the grant price. Exercising ISOs can also trigger Alternative Minimum Tax (AMT), as the discount received on shares acquired through exercise is included in the AMT income calculation if the shares are not sold in the year of the exercise.

Why Ask This?

• Clients and prospects should consult with a tax professional to understand potential AMT consequences before selling ISOs.
• Qualifying dispositions of ISO shares eliminate ordinary income tax on the discount received by acquiring stock below market price. Gains over the grant price are taxed as capital gains.
• The qualifying disposition thresholds for ISOs are at least two years from grant and at least one year from exercise.
• If a sale of ISO shares does not meet the qualifying disposition threshold it will be considered a disqualifying disposition and will cause the discount received by acquiring stock below market price to be taxed as ordinary income.