Because ellen does not have taxable income to report

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grant price). Because Ellen does not have taxable income to report, her employer will still forego a tax deduction. But now, the gain of $32,500 ([$90-$25] x 500 shares) is all taxed as a long-term capital gain, which is a considerable advantage over ordinary tax rates. Patience pays…if you can wait. Another very important distinction between an ISO and a non-qualified stock option is gifting. An ISO must be non-transferable, which means that only the executive who received the grant can exercise it. On the other hand, an NQSO can be gifted, subject to gift tax rules. This means that the executive could
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give their NQSO to a child or grandchild to help with a financial need. Gifting an NQSO will remove an asset from the participant’s broader estate and target the money towards one specific beneficiary. Q: Peter has an ISO through his employer. The strike price is $35, which happens to be the current market price. Peter exercises this option 2 years later when the stock is trading at $75 per share. What is the tax impact at the time that Peter exercises his option? A: Because this is an ISO, Peter will have absolutely no tax effect when he exercises the shares. Q: Peter has an ISO through his employer. The strike price is $35, which happens to be the current market price. Peter exercises this option 2 years later when the stock is trading at $75 per share and then sells it 6 months later at $90 after a better than expected earnings report. What is the tax impact at the time that Peter sells his shares? A: This is an ISO, and Peter did not meet the 2-year/1-year holding period rule. This option will be treated like an NQSO. Peter will need to pay taxes on $40 per share ($75-$35) at ordinary rates and another $15 per share ($90-$75) at short-term capital gains rates, which is the same thing as paying at ordinary rates. Q: Peter has an ISO through his employer. The strike price is $35, which happens to be the current market price. Peter exercises this option 2 years later when the stock is trading at $75 per share and then sells it 13 months later at $90 after a better than expected earnings report. What is the tax impact at the time that Peter sells his shares? A: This is an an ISO, and in this case Peter did meet the 2-year/1-year holding period rule. The difference between his basis ($35) and the selling price ($90) will be treated as a long-term capital gain. This is the best tax scenario for Peter.
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Employee Stock Purchase Plans An employee stock purchase plan (ESPP) is nothing more than a discount stock purchasing program for employees. An ESPP must be approved by shareholders before it is implemented. This benefit is only available to full-time employees of the company (no sub-contractors) who have at least 2 years of completed service, but anyone who already owns 5% of the company cannot participate in an ESPP. The plan is limited to $25,000 in actual purchases for any given year.
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  • Spring '14
  • VOSS,JAMESA
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