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Executive Acronyms: ISO

Retirement Funding Managing Your Finances


Welcome to Curt's Chalk Talk, the Executive Acronym Series. I'm Curt Sheldon with C.L. Sheldon & Company and today we're going to talk about ISO or incentive stock option.

In an ISO plan, you have the opportunity or option to purchase stock at a set price at some point in the future. If you leave the company before that time passes you lose the ability to purchase the stock at that price and therein lies a substantial risk of forfeiture that is required to keep this grant of the ISO tax deferred. Now when the option does vest or becomes yours under the normal tax regime, there is no tax implications.

However, under the alternative minimum tax regime, the difference between the exercise price and the fair market value on the day the stock option vests is considered income and must be declared. So if you do have an ISO plan at work, you want to calculate your taxes both under the normal regime and the alternative minimum tax to ensure that you don't owe alternative minimum tax.

Now when you sell this stock that you purchased, it is eligible for capital gains treatment. The difference between the purchase price and the sale price is capital gains. If you've held the stock for at least one year or two years past the granting of the option, whichever is later, those gains will be treated as long-term capital gains and will get a preferential tax rate.

If you'd like more information about executive compensation plans, get our white paper at www.clsheldon.com/executive. That's www.clsheldon.com/executive.


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