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Old 03-05-2015, 02:40 PM   #41
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...someone who cashes in options that they earned over many years is simply not as 'rich' as the person who makes that same amount year in and year out - yet they are taxed the same...
I'm quite sure there are legitimate cases where the progressive tax code is a penalty of sorts on windfalls. The OP might be such a case. But, as it pertains to stock options specifically, it's been my observation that the more frequent cases of tax shock are simply the result of inadequate planning.

I guess I was fortunate. Even after ER, no one ever forced me to exercise options to the detriment of my tax situation. I did have years that spiked into very high brackets due to option exercises. But that was my decision after weighing the price risk, timing, and other considerations.

My overall objective was to limit concentration in Megacorp stock and get the money into the balanced portfolio as quickly as possible without creating a tax disaster or sacrificing potential future growth. Usually, I exercised the oldest, in-the-money options every year, in approximately the same amount of shares as I was granted each year. So the income stream was spread out to minimize taxes and closely tied to what I "earned" on an annual basis.

Had I clung to them for years hoping for big gains, then exercised all at once and paid tax through the nose... well, I don't consider that a shortcoming in the tax code. It's just a less tax-efficient exit strategy.
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Old 03-05-2015, 03:14 PM   #42
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Originally Posted by Cobra9777 View Post
I'm quite sure there are legitimate cases where the progressive tax code is a penalty of sorts on windfalls. The OP might be such a case. But, as it pertains to stock options specifically, it's been my observation that the more frequent cases of tax shock are simply the result of inadequate planning. ...

Had I clung to them for years hoping for big gains, then exercised all at once and paid tax through the nose... well, I don't consider that a shortcoming in the tax code. It's just a less tax-efficient exit strategy.
Yes, but I was really commenting in the more general case. Someone might have variable income for any number of reasons, and the progressive tax can 'penalize' them, w/o income averaging offsets (which are not available for most anymore).

Someone might have a business that pulls in very little, and then they have a great year once in a while. If they are prudent, the keep their spending down to reflect the average, but they get taxed on the peaks.

FWIW, for the small options that I got from MegaCorp, as soon as I was able to exercise them, and they were ITM, I sold. I figure the options themselves were a sure thing (if ITM), but the future price of the stock was a gamble. In this case, I went with the sure thing. It worked out on average, and was still the prudent thing to do, even if the stock had gone up.

-ERD50
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Old 03-05-2015, 03:29 PM   #43
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Also, we're tossing around the term "option" and the tax issues for ISOs and nonQuals (incentive stock options and non-qualified options) are quite different.
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