NQSO and tax implications

[Pacinotti]

Hi everyone; I have non-qualified stock options that I must dispose of prior to FIRE'ing from the company , which I plan to do in 2022. The total remaining is around $1.2M at current valuation, before taxes. I've exercised sufficient options this year that will place my total estimated income for 2019 at around $1.2M, so solidly in the 37% bracket (MFJ status). For 2020 and 2021, if I were to exercise the remaining options, estimated income would be around $900K, so once again, marginal bracket is 37%.

So here is my question, if I believe there is no benefit to me in waiting to exercise shares in '20 and '21, i.e., assume share price will be about the same and reducing exposure to 1 stock is beneficial, form a tax perspective, is there a down side to exercising all options this year, with my income ballooning to $1.8M. I am already at the highest brackets for Federal and State, is there some 'hidden' tax that I am not considering by climbing into this much higher income level.

I still have about $1.6M in company stock that I own (via ESPP) so I don't have to dispose of it prior to FIRE'ing from the company but being at a lower marginal tax rate for 2020-22 would allow me to sell some of those (highly appreciated) shares at the 15% bracket instead of the 20% bracket for LTCGs. Although I do not intend to sell them all.

Thanks in advance for your advice and opinions.

 

[GrayHare]

Would you be in the top bracket without the options? If not that means some of the option income is taxed at less than the top rate, and that means you'll pay less tax in total if you spread the option income across years.

 

[RunningBum]

Right, without the options you may be in a lower bracket in 2020 and 2021 and be able to recognize some of the income at a lower than 37% rate.

That said, I'd think carefully about how likely it is for the stock to drop. I kept a lot of my stock options in 2000 and watched the dotcom bubble burst and they all went underwater and stayed there. I don't remember how much money I gave away back then, but it was easily over $1 million. Don't try to squeeze a few % out of taxes and risk losing it. I would probably exercise the majority of the options and keep for 2020 and 2021...maybe something to the top of a lower tax bracket. But I say that knowing nothing about your company and little else about your situation, so really all I have to go on is my experience.