Transcript: Hi, I’m Tom Lo from Vested Financial Planning, and I’m here to help you understand why you should exercise your ISOs early in the year.
The reason you want to exercise your ISOs early in the year? You can save on taxes and minimize the risk of paying AMT. As you may know, when you exercise and hold your ISOs for more than a year, then they qualify for the lower, long-term capital gains tax rate. However, you may have to pay AMT on that exercise. The key thing to understand about AMT is that you only have to pay AMT if you exercise and hold your ISOs and hold them into the next tax year.
What I do with my clients is the following: We will exercise on let’s say January 2nd, 2021. We get to December and the stock price is the same or higher than when they exercised. The client will hold those ISOs until January 3rd, 2022. So now it’s qualified for long-term capital gains tax rate, and we can sell it for that lower tax rate. We are required to pay AMT, but that’s okay because we know we have the gain there.
Alternatively, if we exercise January 2nd, 2021, we get to December the stock price has dropped a lot. If the client held it till January 3rd, 2022, they would owe a bunch of AMT on stock that was worth a lot less. Instead, what we would do is in December, we would sell and then we don’t have to pay any AMT. We just pay ordinary income on whatever the gain or potentially the loss there is on that stock.
That’s why we want to exercise early in the tax year so that you can save on taxes and minimize any risks that you have of paying AMT.
If you want to learn more, come to my website at vestedfinancialplanning.com. Thank you very much.
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.