Tax Planning for Stock Options and RSUs

## Understanding Equity Compensation Tax

Equity compensation is one of the most tax-complex parts of a tech worker's income. The tax treatment depends on the type of equity, when you exercise or sell, and how long you hold.

## RSUs (Restricted Stock Units)

RSUs are the most straightforward. When shares vest, you owe ordinary income tax on the full fair market value:

- **At vesting**: Ordinary income tax + FICA on FMV of shares.
- **At sale**: Capital gains tax on any appreciation after vesting.
- **Withholding**: Company typically sells shares to cover tax (sell-to-cover).

### RSU Tax Planning Strategies

1. **Sell immediately at vest**: If you want to minimize stock concentration risk.
2. **Hold for 1+ year after vest**: Any additional gains taxed at long-term capital gains rates (0/15/20%).
3. **Bunch deductions**: If you have multiple large vesting events, consider timing charitable donations or other deductions in the same year.

## Stock Options: ISOs vs NSOs

### ISOs (Incentive Stock Options)

ISOs receive favorable tax treatment if you meet the holding requirements:

- **At exercise**: No regular income tax (but watch out for AMT).
- **Qualifying disposition** (hold 2+ years from grant, 1+ year from exercise): Entire gain taxed at long-term capital gains rates.
- **Disqualifying disposition**: Spread at exercise taxed as ordinary income.

### The AMT Trap

The spread between exercise price and FMV at exercise is an AMT preference item. If you exercise a large number of ISOs, you could owe Alternative Minimum Tax even though you haven't sold any shares.

**Example**: You exercise 10,000 ISOs with a $10 strike price when FMV is $50. The $400,000 spread is an AMT adjustment. At a 28% AMT rate, you could owe $112,000 in tax on paper gains.

### Strategies to Manage ISO AMT

1. **Exercise and hold across multiple years**: Spread the AMT impact.
2. **Exercise and sell same year**: No AMT, but taxed as ordinary income.
3. **Early exercise with 83(b) election**: Exercise before shares appreciate to minimize AMT.
4. **Model AMT scenarios**: Use tax software to find the optimal number of shares to exercise.

### NSOs (Non-Qualified Stock Options)

NSOs are simpler but less tax-efficient:

- **At exercise**: Spread (FMV minus strike) taxed as ordinary income + FICA.
- **At sale**: Gain above FMV at exercise taxed as capital gains.

## ESPP Tax Optimization

Employee Stock Purchase Plans offer a guaranteed discount (typically 15%) plus a lookback provision:

- **Qualifying disposition**: Discount taxed as ordinary income, additional gain as capital gains.
- **Disqualifying disposition**: All gain up to FMV at purchase taxed as ordinary income.

For most employees, the optimal strategy is:
1. Contribute the maximum allowed.
2. Sell immediately at purchase (same-day sale).
3. This captures the 15%+ discount with no stock risk.

## International Considerations

If you relocate while holding equity:
- RSU income may be allocated between countries based on days worked in each jurisdiction.
- Some countries tax equity differently (UK gives favorable treatment to EMI options).
- Double tax treaties may provide relief, but claims require careful documentation.

## Key Takeaways

1. RSUs are taxed at vesting; plan for the tax withholding impact on your cash flow.
2. ISOs can save significant tax if you can manage the AMT exposure.
3. Always model the tax scenarios before exercising options.
4. ESPP participation with immediate sell is almost always beneficial.
5. Get professional tax advice if equity is a significant part of your compensation.