Planning for Employer Stock Options, Employer Stock Held in Retirement Accounts, and Restricted Stock

This chapter covers easy to implement tax-saving ideas for employer stock options, employer stock held in qualified retirement plan accounts, and restricted employer stock. There are two basic varieties of employee stock options: incentive stock options (ISOs) and nonqualified stock options (NQSOs). The chapter discusses alternative minimum tax rules for ISOs and ISO shares, as well as for disqualifying dispositions of ISO shares. When an employee exercises an NQSO, the bargain element is treated as ordinary income from compensation. The income is therefore subject to federal income tax. According to some reports, restricted stock awards are replacing stock option grants as the common form of equity-oriented executive compensation. The chapter explains the federal income and employment tax impact of restricted stock awards. For federal income and employment tax purposes, stock is considered to be restricted when the stock is subject to a substantial risk of forfeiture and the stock is not freely transferable.