In this video, I explain my strategy for Snowflake employees with Incentive stock options to save on taxes and minimize their risk of paying Alternative Minimum Tax.
How Snowflake Employees With ISOS Can Save on Taxes Transcript:
Hi, this is Tom Lo from Vested Financial Planning and I’m here today to help Snowflake employees with Incentive Stock Options or ISOs save on taxes and minimize the risk of paying unnecessary Alternative Minimum Tax or AMT.
This strategy I call the “exercise early in the year” strategy. The way this works is that at the beginning of the year, you exercise your ISOs and you hold them. Then come at the end of that same calendar year, you look and see what’s happened with the price. If the price has dropped a lot, you can go ahead and sell your ISOs. Then you just pay ordinary income and you don’t owe any AMT. What you don’t want to happen is when you go into the next tax year, you’re locked into AMT but the value of your stock has gone down a lot meaning that if you sell it, you don’t get much out but you still owe a bunch of AMT.
If you get to the end of the year and the stock is the same price or higher, then you get to the beginning of the following tax year. As long as you’ve held your ISOs for more than a year, they qualify for the lower long-term capital gains tax rate. So it’s ok if you pay your AMT. You sell it for a lower tax rate and you pay your AMT and you only have to wait a few days into the new tax year to get that.
Let me give you a quick example. Let’s say it’s January 2nd of 2021. You exercise your ISOs. You get to December of 2021. Again, if the stock is lower and it’s dropped a lot, you go ahead and sell it. You then pay ordinary income and you don’t have to pay any AMT. Alternatively, if the stock is the same or higher, you hold it until January 3rd of 2022. Now you’ve held it for more than a year, your ISOs for more than a year. They again qualify for the lower long-term cap gains tax rate. So that is saving on taxes. Your ordinary income for Federal is as high as 37%. The highest long-term cap gains is 20% so in that case, you’d save 17% on taxes. January 3rd you can sell it and pay your AMT but you’ve minimized the amount of time you gotta wait. You only had to wait three days into the new year before you qualified for that long-term cap gains tax rate.
So this is a way if you’re a Snowflake employee to exercise your ISOs, you can save on the taxes, but again, you minimize the risk of paying unnecessary AMT.
If you have questions about your specific situation, please go schedule a free virtual consultation. Thanks a lot!
After 20 years working for companies including eBay, Yahoo!, Intuit, and startups, I made a career change into the financial world as a fee-only financial planner 9 years ago. I earned my CFP®, spent a few years at a boutique fee-only firm in San Jose, worked 2 1/2 years at a leading wealth management firm in San Francisco, and then left to build the firm I wish had existed when I was working as a tech professional.
My mission is to help other Silicon Valley professionals make the most of their employee equity to help them reach their financial goals.
