"Deciding when to exercise your option can be a intricate decision. Therefore, it is important to know the rules before you decide to cash in your options."
Know the Rules
Employee stock options can provide you with a substantial source of deferred income and permit you to control the recognition of taxable income. You generally pay no tax when an option is granted because you are not receiving any shares of stock, unique the option to purchase shares at a later date.
In general,
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Know the Difference
Nonqualified Stock Options (NSOs) give an employee the option to buy corporate stock at a specified, fixed price (usually at fair market value at the time the option is granted). In general, you must exercise your option to buy within a specified time period--quintessentially 10 years or less.
Upon exercising your rights, any gain realized from the spread (the difference between the exercise price and the impartial market value) is taxed as mundane income. However, any gain realized from the date the option exercised until the date the stock is sold is taxed as capital gain.
Incentive Stock Options (ISOs) also offer the option to purchase corporate stock at a set price,
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Generally, the spread on ISOs is not subject to ordinary income tax at the time you exercise the option. However, spreads may be subject to the alternative minimum tax (consult your GROCO financial adviser for more information). Gain realized upon the sale of the ISO stock may be taxed as capital gain. Provided you have held the ISO stock for at least one year from the date of exercise and at least two years from the date the option was granted,
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When to Exercise Your Options
The decision of when to exercise your options depends on several factors as well as your componenticular situation:
Your Company's Plan
Generally, options become exercisable over a period of years. For example,
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Your Company's Growth
Understanding how your company is poised for growth is another important factor in your decision making process. Issues to review and understand are:
How your company makes money understand the industry that their earnings are tied to. Evaluate sales compare your companys sales to the industry average of competitors. Industry trends monitor the industry that your company operates in. Look for growth opportunities and understand your companys strategy for capturing market share. Understand the factors that can affect the liquidity of the market are lower interest rates and tax cuts freeing up resources for the companys growth plans? How your company is financing growth are they growing as expected? Know your leaders and their track record a companys strong executive team will likely yield continued success. Understand your companys P/E (price to earnings) ratio look for strong cash flow and well-managed costs.
Finally,
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Your Current Financial Needs
The decision to exercise should consider the need for cash, the proximity to the option's expiration and/or the current stock value as compared to its expected future value. With regard to ISOs,
beats by dre, becautilize of taxes, the required holding periods should be considered when determining when to exercise the options and/or sell the underlying stock.
Balancing Your Portfolio
You may also choose to exercise an option if your company's stock represents a large portion of your investment portfolio and you wish to diversify your holdings. Some professionals say to reduce investment risk, company stock should not represent more than 40 percent of your portfolio.
Market Conditions
Obviously, market conditions will play a large role in your decision to exercise your option. If the stock underlying the option appreciates, you may wish to hold on to options as long as feasible in order to take advantage of future gains.
Tax Ramifications
In the case of NSOs, you may want to consider exercising your option over a few years to shun being coercesd into a higher tax bracket. Remember, the spread on NSOs is subject to regular income tax at the time of exercise. Because appreciation occurring before exercise is taxed as ordinary income, it may be advantageous to exercise over time.
Your company's nonqualified stock options may be transferable to family members. If so, you may be able to trim your estate tax by giving options to your heirs. The transfer may be gift tax free if the value transferred is $11,
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