{"id":453,"date":"2023-06-04T23:27:51","date_gmt":"2023-06-04T23:27:51","guid":{"rendered":"https:\/\/ludmilacpa.com\/?p=453"},"modified":"2023-06-05T14:09:40","modified_gmt":"2023-06-05T14:09:40","slug":"the-abcs-of-isos","status":"publish","type":"post","link":"https:\/\/ludmilacpa.com\/the-abcs-of-isos\/","title":{"rendered":"The ABCs of ISOs:"},"content":{"rendered":"\n

Understanding Taxes on Incentive Stock Options<\/em><\/h2>\n\n\n
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VIX\u00ae<\/sup> is a registered trademarks of Cboe Exchange, Inc.<\/figcaption><\/figure><\/div>\n\n\n

Direct income is frequently the first consideration we have when a job offer presents itself. But there are other kinds of compensation that an employer can offer that also are valuable and could even cause less of a hit to your taxes each year. I\u2019m talking about employee incentive stock options, or ISOs.<\/p>\n\n\n\n

ISOs are a form of compensation that a company may offer as an incentive to motivate employees to contribute to a company\u2019s well-being and reward them for its success. Not only can this help protect a company\u2019s bottom line \u2014 particularly a small or up-and-coming business \u2014 but it can benefit employees\u2019 bottom line as well. It motivates employees to work harder, aligning their goals with those of the employer, and if the stock grows, it can be financially rewarding.<\/p>\n\n\n\n

And because of certain conditions under our tax law, ISOs also involve less of a tax burden on the employees who receive them. It may sound too good to be true \u2014 and sometimes it is. Here\u2019s what you need to know.<\/p>\n\n\n\n

The Basics of ISOs<\/strong><\/p>\n\n\n\n

The notion of tax benefits as they pertain to ISOs is highly complex, but in a nutshell, think of two compensation scenarios. In the first, you\u2019re offered, for example, an annual salary of $200,000. In another, your offer is for $150,000 in income, and another $50,000 in ISOs.<\/p>\n\n\n\n

In the first scenario, you\u2019d be taxed at the $200,000 income tax bracket, which is 32%, and in the second, your income tax bracket is 24%, with capital gains tax applying to any earnings received from the sale of stock options. The current capital gains on $50,000, for example, is 15% for individuals (excluding the 3.8% Medicare surtax).<\/p>\n\n\n\n

Though this is a very simplified explanation, you can see how ISOs could be beneficial for high-income individuals.<\/p>\n\n\n\n

There are two types of employee stock option plans:<\/p>\n\n\n\n