Stock Option Planning

Making the Most of Your Stock Options

Gosho Financial Group has worked with clients in Silicon Valley for over four decades, helping them build lasting financial security. We have created financial plans for many people working in the tech sector and have experience with IPOs and a variety of employee stock option programs.

Here are a few of the ways we can help you earn more:

Tax planning

Tax planning is critical for people who receive stock compensation. The timing of when you exercise stock options affects your tax rate and can make a significant difference in the value you get from your company stock. For example, if you hold ISO shares for at least a year after exercise and two years after your grant date, your stock sale can qualify for the long-term capital gains rate. We take a holistic view of wealth planning and will help you determine the best time to exercise your options based on your whole financial picture.

Investments that work for you over the long term

We’ll help you review the pros and cons of balancing some of your concentrated employer stock position versus diversifying to a personalized stock portfolio. We create custom stock portfolios for our clients, choosing the best investments to achieve your life goals. That could include holding some of your stock options or using the proceeds of an initial public offering or other stock sales to purchase stocks or other investments.

Planning for early retirement

Though most startups don’t become unicorn companies valued at over $1 billion, IPOs and stock options enable many people to retire well before 65. If you want the option to retire early, we can provide stock option planning and overall investment planning to set you on a path to your goal. With a solid plan, nothing is impossible.

Developing passive income sources

Passive income makes retirement easier at any age. Our personalized investment portfolios can provide passive income, allowing you to live off the income from your investments without touching the principal. Many of our clients choose this strategy to provide security for the entire span of their retirement years.

Stock option planning to meet your life goals

Retirement isn’t the only reason for building your savings. You might want to buy a home, go back to school, or pay for bucket-list travels. When we start working with a new client at Gosho Financial Group, we take the time to understand your finances and your aspirations so we can create a personalized plan that’s right for you.

There are several different types of employee stock options. Each has different tax consequences and requires a specific approach to stock option planning. Here are three of the most common.

Non-qualified stock options (NSOs)

A non-qualified stock option is often abbreviated to NSO or NQSO and is common in early-stage or pre-IPO startups. NSOs allow you to exercise a specific number of company shares at a fixed price, usually at the share value on the date you’re granted the NSOs. If the stock appreciates, you can still buy shares at the fixed price during the window to use your stock options.

When you sell shares bought through non-qualified stock options, the profit is taxed as a short-term capital gain, no matter how long you’ve held onto them. The short-term capital gains tax rate is the same as your income tax bracket. You can write off a loss on your taxes, and you may lose some or all of your NSOs if you leave the company before you’re fully vested, a process that can take several years. 

A Gosho Financial Group advisor can help you understand when to exercise your options based on our extensive knowledge of stock market conditions and trends. With our guidance, you can realize the full value of this portion of your salary, choosing the right moment to maximize profits and minimize your tax burden.

Incentive stock options (ISOs)

Like NSOs, incentive stock options (ISOs) give you the ability to buy stock at a fixed price, However, ISOs have preferential tax treatment. Incentive stock options must be exercised within 10 years of the grant date and are usually fully vested in  four  years, though the time you must wait before you can exercise your options varies by company. Once you complete the vesting period, you can exercise your vested options. 

How long you hold ISO stock can have a significant effect on what you owe in taxes. We can run the numbers for different scenarios to see the impact on taxes and profits of holding your employee stock for various periods of time. If you hold shares bought through an ISO for at least one year, you pay long-term capital gains taxes, which are lower than ordinary income taxes. 

Your long-term capital gains rate will be 20% or less, depending on your tax bracket. If your adjusted gross income exceeds a certain amount, you may also owe a 3.8% net investment income tax on your gains. Tax planning is integral to Gosho Financial Group stock option planning.

Investing in Incentive Stock Options (ISOs) without a tax strategy can be costly. For instance, if you sell $1,000 worth of ISO stock, holding the shares long enough to qualify for the long-term capital gains rate results in taxes ranging from 15%-20%. However, if you sell too soon, you could owe 25%-40% in taxes. This difference can cost you up to 25%, reducing the value of your stock compensation.

Alternative Minimum Tax (AMT) and ISOs

In California, exercising ISOs can trigger significant tax consequences due to the Alternative Minimum Tax (AMT). We often refer to AMT as the "Maximum Mandatory Tax" because if it surpasses your regular tax obligations, you're required to pay the higher amount. 

You could be subject to the AMT based on income that wouldn’t otherwise be taxable, such as the difference between the fair market value at exercise and the ISO's strike price (the price at which you purchase the stock). Normally, you wouldn’t owe capital gains taxes on the difference in price until you sell your shares, but it’s taxable under the AMT the year you exercise, which can trigger a large tax obligation. 

Additionally, California has high state income taxes and local property taxes, which aren't deductible under AMT. If you're a California resident with an ISO plan through your employment, we can help you understand and prepare for the Alternative Minimum Tax consequences when you exercise your ISOs.

Restricted stock

A restricted stock unit (RSU) is stock given to an employee that can’t be sold for a specified amount of time. Restricted stock can’t be transferred, and unlike options that you must exercise, RSU shares are awarded on vesting. 

You will owe income taxes on your RSUs as soon as they vest.  If your RSU stock goes up or down in value by the time you sell it, you’ll owe capital gains tax or be able to declare a capital loss. Our holistic financial planning can help you manage your total taxes, taking this stock compensation into account.

Employee Stock Purchase Plan 

Employee Stock Purchase Plans (ESPPs) offer employees the opportunity to purchase company stock at a discount of up to 15%. Typically, ESPP purchases are deducted from your paycheck automatically, with your employer facilitating the stock acquisition.

When you sell shares acquired through an ESPP, you'll incur income tax on the discount you received (the difference between the purchase price and the stock price on the purchase date). Any further gains are subject to taxation as either long-term or short-term capital gains, depending on your holding period.

ESPPs introduce an additional tax consideration: if you hold onto your shares for at least two years from the grant date and one year from the purchase date, you'll only owe income taxes on a portion of the discount. Gosho Financial Group can help you successfully navigate the complexities of tax planning for ESPPs.

If you receive stock options as part of your compensation package and your company plans an initial public offering (IPO), you may be overwhelmed by the many decision points involved in your stock option planning. 

Gosho Financial Group can help. Certified Financial Planner® and principal Carol Gosho has decades of experience helping clients manage taxes and build wealth.  Advisor Marjan Soleimanieh brings an extensive background in the tech industry to her financial planning work, including experience assisting clients to navigate IPOs.