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The Abcs Of Stock Options North Carolina

As a performance incentive many companies are starting to offer employees the "option" to buy company stock as a part of their compensation packages. These "options" are referred to as stock options and they provide a unique opportunity for an employee.

Local Companies

Stanford Financial Group
(704) 571-7900
4725 Piedmont Row Drive
Charlotte, NC
Wachovia Insurance Services, Inc.
(704) 553-0419
6100 Fairview Road
Charlotte, NC
Edward Jones Investment
(704) 827-5435
550 Highland St.
Mount Holly, NC
Jefferies & Company
(704) 943-7400
4064 Colony Road
Charlotte, NC
Merrill Lynch
(704) 362-3320
4500 Cameron Valley Parkway
Charlotte, NC
Morgan Stanley
(704) 442-3400
6805 Morrison Boulevard
Charlotte, NC
Morgan Stanley
(704) 442-3400
6805 Morrison Boulevard
Charlotte, NC
UBS Financial Services Inc
(704) 362-8200
UBS Financial Services Inc.
Charlotte, NC
Brookwood Associates, LLC
(704) 372-1399
121 West Trade Street
Charlotte, NC
Fennebresque & Co., LLC
(704) 295-8900
100 North Tryon Street
Charlotte, NC

A stock option is a right granted by a company to an employee to purchase one or more shares of the company’s stock at a set time and predetermined purchase price. The employee benefits when the value of the company stock appreciates over and above the predetermined purchase price following the granting of the stock options, enabling the holder to purchase the company stock at a discount. There are two types of stock options: non-qualified stock options and incentive stock options.

Non-qualified stock options (NQSO) are more frequently offered to employees than Incentive Stock Options because of their flexibility and minimal requirements. NQSOs afford the employee the right to purchase a set number of employer shares at a specific, predetermined price. If the employee wishes to acquire the employer stock then he or she will exercise the option and purchase the employer stock at the predetermined (exercise) price. If the stock’s value has appreciated over and above the predetermined price the employee has received the benefit of acquiring the stock at a discount. The difference between the exercise price and the market value (commonly referred to as the bargain element) will be taxable income to the employee as ordinary income, potentially as high as 35%.

The other type of stock option is the Incentive Stock Option (ISO). In direct contrast to a nonqualified stock option, there is no income tax consequence when an employee exercisers the option to buy the employer stock. The difference between the exercise price and the market value (bargain element) is only taxable upon the ultimate sale of the employer stock. In other words, a gain is only recognized when the employer stock is sold and not when the option is exercised. If the stock is held the appropriate time period before being sold, all the gains recognized may qualify for long-term capital gains treatment, a maximum rate of 15%.

Being able to take part in an ISO program allows an employee to receive a number of tax saving benefits. But with these tax benefits comes added complexity to keep track of and to understand. For example, to qualify for the favorable long-term capital gain taxation, the employee must hold the stock for at least two years from the date the ISO was granted and for at least one year from the date the option was exercised. This is commonly referred to as the “2 year / 1 year rule”. If the employee sells the stock before these requirements are met, gain on the stock is taxed as ordinary income in the year of the sale, essentially converting the ISO to a non-qualified stock option.

An additional complexity of an ISO that should be kept in mind by the employee is the potential for an alternative minimum tax (AMT) consequence upon exercise of an ISO. For this and other reasons, it remains important to work with your financial advisor and tax professional when evaluating the strategies to take full advantage of the opportunities and benefits of stock options.

About the Author:

Ken Morris

Fearing the American worker is being left in the dark, Mr. Morris, a fee based Investment Advisor Representative with Raymond James Financial Services, Inc., helps 401k participants get the most out of their retirement plan.

raymondjames.com


Article Source:

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Featured Local Company

Stanford Financial Group

(704) 571-7900
4725 Piedmont Row Drive
Charlotte, NC
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