What would the taxes be if I exercise my startup options?
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Re: What would the taxes be if I exercise my startup options?
#2I can hear all the non-US persons reading this article and laughing about all the insane idiocy that we put up with from the US tax code and IRS.
All US persons have to put up with at least this amount of calculation every year (otherwise pay more than is strictly necessary, or possibly suffer penalties and fines later), and the details constantly change with the political tides.
This is why tax reform crops up as an issue every 4 years, though it somehow never manages to survive past primary season to the general election.
Re: What would the taxes be if I exercise my startup options?
#3I can hear all the non-US persons reading this article and laughing about all the insane idiocy that we put up with from the US tax code and IRS. All US persons have to put up with at least this amount of calculation every year (otherwise pay more than is strictly necessary, or possibly suffer penalties and fines later), and the details constantly change with the political tides. This is why tax reform crops up as an…
Tax reform never survives because there is no consensus on how it should be fixed. Some folks think we should "simplify" by eliminating deductions - things like home mortgage interest, child care expenses, medical expenses & health insurance premiums. Other folks think we should "simplify" by eliminating corporate tax breaks & subsidies, and change how we tax things like stock trades & financial instruments. Still others think we should scrap the whole system and just impose a flat tax. Everyone benefits a little under the current system, and no one wants to trade the devil in the details of a "reformed" system for the deal they've got now.
The ideas that are tenable can't be popular enough to succeed (since we're all just temporarily disenfranchised millionaires, and it could always be worse), and the ones that are simplest aren't palatable once all the details are worked out. So we do nothing, because that's easy.
Re: What would the taxes be if I exercise my startup options?
#4It completely depends what type of options you have.
If they are incentive stock options then you will need to report the value of the bargain element (fair market value of the options less the amount you actually paid) as AMT (alternative minimum tax) income. The AMT tax rate is ~27%.
Say your stock is worth $110 and you pay $10. Your bargain element is $100 and your AMT is ~$27, federal. Your state could also have tax reporting requirements on the exercise of your options.
This assumes you exercise and hold. If you sell the shares after exercise a whole host of other issues come into play.
Fairmark.com is a good resource for the tax implications of equity compensation. http://fairmark.com/execcomp/index.htm
Good Luck!
Re: What would the taxes be if I exercise my startup options?
#5I can hear all the non-US persons reading this article and laughing about all the insane idiocy that we put up with from the US tax code and IRS. All US persons have to put up with at least this amount of calculation every year (otherwise pay more than is strictly necessary, or possibly suffer penalties and fines later), and the details constantly change with the political tides. This is why tax reform crops up as an…
"All US persons have to put up with at least this amount of calculation every year "
This is most certainly not the case. My taxes aren't that complicated (despite having to file in two states each of the last few years, and three states this coming year), and I was doing the 1040-EZ up through about 2009-ish.
Re: What would the taxes be if I exercise my startup options?
#6I can hear all the non-US persons reading this article and laughing about all the insane idiocy that we put up with from the US tax code and IRS. All US persons have to put up with at least this amount of calculation every year (otherwise pay more than is strictly necessary, or possibly suffer penalties and fines later), and the details constantly change with the political tides. This is why tax reform crops up as an…
Tax reform never survives because there is no consensus on how it should be fixed. Some folks think we should "simplify" by eliminating deductions - things like home mortgage interest, child care expenses, medical expenses & health insurance premiums. Other folks think we should "simplify" by eliminating corporate tax breaks & subsidies, and change how we tax things like stock trades & financial instruments. Still ot…
This bureaucratic system also survives due to the vested interests of CPAs, tax preparers, and tax attorneys making their living off of it.
Re: What would the taxes be if I exercise my startup options?
#7It completely depends what type of options you have. If they are incentive stock options then you will need to report the value of the bargain element (fair market value of the options less the amount you actually paid) as AMT (alternative minimum tax) income. The AMT tax rate is ~27%. Say your stock is worth $110 and you pay $10. Your bargain element is $100 and your AMT is ~$27, federal. Your state could also have…
Would it be fair to say that, if one was set on exercising, that they do so for whatever amount has vested after their one year cliff, and then exercise the remainder (13/48-48/48) each month over their 4 year earn out in order to have as much of the stock covered under long term capital gains tax when it comes time to sell?
Hypothetically speaking, of course.
Re: What would the taxes be if I exercise my startup options?
#8I can hear all the non-US persons reading this article and laughing about all the insane idiocy that we put up with from the US tax code and IRS. All US persons have to put up with at least this amount of calculation every year (otherwise pay more than is strictly necessary, or possibly suffer penalties and fines later), and the details constantly change with the political tides. This is why tax reform crops up as an…
"All US persons have to put up with at least this amount of calculation every year " This is most certainly not the case. My taxes aren't that complicated (despite having to file in two states each of the last few years, and three states this coming year), and I was doing the 1040-EZ up through about 2009-ish.
the point is that there is almost always a non-zero amount of work you have to do to file your taxes. Depending on your situation the amount of work can increase.
For a large chunk of people the IRS already knows what they're supposed to be paying. Those people are still put throughout the 'tax return' exercise.
I think the other commenters are right that for someone that's not familiar how taxes work in the US this seems overwhelming. I know I had a few people laugh/be amused when I was first attempting to figure out how it works and actually attempted going through the 1040 instructions. The reactions I got: blank stare + dude that's what turbotax is for...
Re: What would the taxes be if I exercise my startup options?
#9I can hear all the non-US persons reading this article and laughing about all the insane idiocy that we put up with from the US tax code and IRS. All US persons have to put up with at least this amount of calculation every year (otherwise pay more than is strictly necessary, or possibly suffer penalties and fines later), and the details constantly change with the political tides. This is why tax reform crops up as an…
"All US persons have to put up with at least this amount of calculation every year " This is most certainly not the case. My taxes aren't that complicated (despite having to file in two states each of the last few years, and three states this coming year), and I was doing the 1040-EZ up through about 2009-ish.
You can't know if your itemized deductions will exceed the standard deduction unless you itemize your deductions on a draft schedule A. There is a chance that you could have owed less tax if you used the regular 1040 form, rather than the 1040-EZ, if you had medical expenses, gave to charity, had a home mortgage, suffered a loss due to crime, paid tax in another jurisdiction, etc, etc, etc.
And if you use the 1040-EZ, there's also a good chance that you filled out some worksheet to see if you were eligible for the earned income credit, or some other speculative calculation that might reduce your tax, if and only if the number you get at the end of the calculation is nonzero. And in theory, everyone always has to check to see if the AMT is greater than their calculated 1040 tax.
One of the perennial excuses I hear for not replacing the bracketed tax tables and forms with a single polynomial function is that it would be too complicated. Clearly, that's a bullshit reason.
Re: What would the taxes be if I exercise my startup options?
#10[deleted]