Are Options Taxed?
Many of us have exercised stock options as part of compensation. This is true from P&G to GE and many other companies. I think most of us assume that we have to pay taxes on these options. And while it’s true that paying Federal and State taxes is a given, it’s not always the case for municipalities.
Stock options are a wonderful way to receive compensation. The options are often additional compensation above and beyond base salary. And it can feel like “found” money considering that most of the time, a person exercises the options well after the options grant. Finally, if a person exercises an option years after it was granted, the stock may have appreciated substantially, creating a relative windfall.
Ben Franklin popularized the saying “nothing is certain except death and taxes”. And of course this is true with respect to options. We all are taxed at the Federal and State level. In fact, options exercises are usually included on the W-2 as part of total income for the calendar year. That income is taxed via withholding just like any other income.
But here’s where it can get a bit tricky. Most municipalities tax stock options. The city of Madeira, where I live, explicitly calls it out on their website. But interestingly enough, the city of Cincinnati excludes stock option compensation from taxable income, saving the taxpayer 1.8% if he/she lives in the city of Cincinnati. The instructions to deduct stock option compensation is contained on page 3 of the city’s individual income tax packet, stated as: Deduct stock option compensation from the Box 5 wages and provide documentation of the same. The bottom line is that it pays to know whether your municipality taxes stock options.
This is an important topic because stock option compensation is lumped together on your W-2 with other compensation that is taxed by the municipality. It’s important, then, that you let your tax advisor know if you’ve exercised stock, so he/she knows to check whether your municipality taxes stock options compensation.
Finally, it’s worth noting that stock option exercise decisions can be a challenge. The added timing variable can lead to analysis paralysis over when to exercise. This creates a unique planning opportunity.
If you have questions about when to exercise stock options or whether your municipality taxes option compensation, feel free to reach out.
Jared
Planning Pays Dividends
Brian Kellett, brian@kellettwealth.com. Phone 513-312-6067
Dave Bodnar, david@kellettwealth.com. Phone 513-258-6973
Jared Kline, jared@kellettwealth.com. Phone 513-768-2238
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