Striving to provide the best financial advice means answering the questions that are most important to you. As part of that, we want to keep you up-to-date on the top 10 questions bringing people to Wealth Enhancement Group so far in 2022. Chances are you have some of the same questions, so read on to find out.
1. What are Incentive Stock Options?
Incentive stock options (ISOs)–also known as qualified stock options –are typically given to highly valued employees as part of their compensation package. A company can only offer ISOs to its employees, and there are limits to how many can be provided.
ISOs provide you with an opportunity to purchase shares of stock at a reduced price. The key benefits of ISOs are the ability to buy shares of your company’s stock at a discount and the potential for preferential tax treatment over other types of employee stock options.
Continue reading about the basics of Incentive Stock Options here.
2. How Are Incentive Stock Options Taxed?
ISOs are reported for tax purposes at two different times when exercised and sold. How they are taxed when sold depends on whether the sale meets the criteria for a qualifying disposition or is considered disqualified.
The preferential tax treatment that makes ISOs so valuable comes from triggering what's called a qualifying disposition. A qualifying disposition happens when you wait to sell shares acquired at least one year after you exercised your ISOs and at least two years after they were granted.
Suppose you fail to fulfill either of the waiting period requirements for a qualified disposition. Then you would have a disqualifying disposition and lose the tax advantage of long-term capital gains rates.
Read more about how Incentive Stock Options are taxed here.
3. How are Non-Qualified Stock Options Taxed?
The first taxable event comes when you exercise your options to purchase shares. Once you exercise your stock option by purchasing stock, the difference between the fair market price of the stock and the exercised price will be taxed as ordinary income. Then, when you sell your shares, you will pay taxes on any realized capital gains. The length you hang onto your stocks affects how you’re taxed. Short-term capital gains are taxed as regular income, so when you sell your shares, you are taxed at the same rate you were when you bought them. However, long-term capital gains are subject to more favorable tax rates.
Read more about how Non-Qualified Stock Options are taxed here.
4. What do You Need to Know About ESPP Tax Rules?
If you are in a position where part of your compensation package includes access to an Employee Stock Purchase Plan (ESPP), this could provide an easy way for you to purchase company stock. Purchases through an ESPP can be set up as automatic after-tax payroll deductions. They could come with added benefits like discounts on market price or lookback provisions. It seems like a good idea, right? Unfortunately, ESPPs are not as straightforward as they sound.
If you plan to participate in your company's ESPP, you should consider how its complexities could impact your financial plan.
Learn more about what you need to know about ESPP tax rules here.
5. What Tax Considerations are Important When Working Remotely Due to COVID-19?
Large portions of the workforce transitioned to working from home as the coronavirus pandemic grew. And that trend will likely continue, with many employers even announcing plans to permanently let employees work from home.
If you are part of the workforce that has transitioned to remote work either temporarily or more permanently, this move could impact your taxes. You should be aware of important tax considerations when working remotely.
Continue reading about these four important considerations here.
6. What is a GRAT and What Are Its Benefits for Estate Planning?
For estate planning purposes, a grantor retained annuity trust (GRAT) is a gifting trust that allows individuals to transfer high-yielding or rapidly-appreciating property or assets (typically stock shares) to a beneficiary with minimal gift or estate tax. The trust also pays out an annuity to the grantor every year, which can work as part of your retirement income strategy.
Learn more about GRATs and their benefits for estate planning here.
7. What Examples Are There of Spousal Trusts?
A standard part of crafting a good estate plan is establishing a trust (or trusts). A trust can help reduce your estate tax liability and keep your assets where they belong: with your family and beneficiaries.
Many kinds of trusts serve many different purposes, and they can sometimes get complicated. However, the simplest, most common types of trusts fall under the term "spousal trusts". These ensure your spouse (and maybe your children and grandchildren) is financially secure after you are gone.
Find out more about the four types of spousal trusts here.
8. Should a Spousal Lifetime Access Trust be Considered?
A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust set up by one spouse for the other during their lifetime. This means the donor spouse does not need to pass away for this trust to be created, which is a stark difference between SLATs and other types of marital trusts that are only established upon death. The beauty of SLATs is that you can use them while you're still here, and they have several benefits that you can see in your lifetime. Many kinds of trusts function in different ways, making it difficult to determine which one is right for you. That's why speaking with your financial advisor, or an estate attorney is wise to help you understand your options.
Read more about spousal trusts here.
9. How Can Large Capital Gain Affect your Financial Plan?
There can be few more satisfying things than for investors who make a savvy move and wind up with a sizeable capital gain. Perhaps the only downside is the tax bill you may face from the capital gain. If it is unusually high, you may find that the costs associated with the gain are higher than expected. We often refer to these unexpected costs as "ripple effects." By that, we mean that the primary, expected expense sends ripples throughout your financial plan that can create unintended consequences. We thought we'd cover two of the most common ripple effects: Net Investment Income Tax (MIIT) and Medicare Premiums.
Continue reading about the ripple effects of large capital gains here.
10. What is the 5-Year Rule for Roth IRA Withdrawals?
The 5-year rule for Roth IRAs essentially means you must wait five years from a specific point in time (read more to cover the specifics) before you can take those tax-/penalty-free distributions. Often, people taking distributions from their Roth IRAs already comply with the 5-year rule without even knowing it. But there are three situations in which it's essential to adhere to the 5-year rule; otherwise, those withdrawals may be subject to income tax and incur a 10% penalty.
