Employers can reward top employees, including company owners, by awarding them incentive stock options (ISOs). Generally, there’s no tax due when the company issues the ISOs or when the individual exercises the options. The IRS taxes the employee only when he or she finally sells the stock.
Strategy: Keep the options for the required holding period. As a result, the IRS taxes any gain at long-term capital gain rates.
Currently, the maximum federal tax rate on long-term capital gain is 15%. (The rate is scheduled to increase to 20% after 2012.)
Here are the key requirements:
- The option must be granted under a plan that specifies the number of shares of stock to be issued and the employees eligible to receive them.
- The plan must be approved by the stockholders of the employer corporation within 12 months of its adoption.
- The option must be granted within 10 years of the date the plan is adopted or the date of stockholder ap...(register to read more)