Stock Option Basics

Wealth Advisor

In this video, Jamison, an advisor at EWA, discusses how to maximize stock options as part of an employer’s compensation package. He focuses specifically on non-qualified stock options (NQSOs) and explores tax planning strategies to maximize their benefits.

Jamison provides an example in which an individual is granted 10,000 shares of company stock at $10 per share, worth $100,000 over the next three years. Assuming the stock price grows to $300 per share by the time it vests, the total value becomes $3 million.

If the individual doesn’t exercise the options and sells immediately upon vesting, they would owe taxes on the $1.9 million growth, resulting in a substantial tax bill. However, Jamison explains a tax-efficient strategy where the options are exercised when the stock price is lower, minimizing the tax liability.

By exercising the options at a lower price point, the tax burden is reduced, and the individual can potentially save a significant amount of money in taxes. Jamison emphasizes the importance of proper tax planning and timing when dealing with stock options to maximize their value.

Video Transcript

Hi, I’m Jamison, an advisor with EWA. And in this video, we’re going to talk about how to maximize stock options if it’s part of your employer’s compensation. Many of our clients, especially if you’re an executive at a big company, a large portion of your compensation is through company stock, whether it’s non qualified stock options, employee stock purchase plan, or restricted stock units.

This video we’re going to specifically look at non qualified stock options in some specific tax planning that can be used to help maximize the benefits. Here’s an example of somebody that gets granted 10,000 shares at $10 a share worth $100,000 over the next three years.

Let’s assume this grows to $300 a share, total of $3 million. Somewhere in that three year period, this stock would vest. Generally, it’s a three year vesting schedule, but we’ll assume after a year or two, it vests when that grows.

If they never exercise these options and they go to sell it immediately, they’re going to have to pay taxes on the growth of $1.9 million. Assuming that that would bump them up to the highest tax bracket, that’s a total of about a million dollars in taxes.

Just about a third of that of the stock is going to be paid in taxes. Okay, so, second example, if this is done correctly and we can maximize some of the tax efficiencies when this vests at, we’ll assume somewhere in between, when it grows to $300 a share, let’s say it vests at $20 a share, which is $200,000 of stock, we’d have to pay taxes on that 100,000 of growth.

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