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Subject:   Non-Qualified Stock Options (NQSO)
Date:   Thu, 15 Jan 2004
From:   Ravi

Michael,

I received a grant of NQSOs in 1999. They are going to expire October, 2004. I am planning to exercise the options. What taxes will apply at exercise? Will the exercise be taxed as ordinary income? I am a resident of Tennessee.

Thanks for your help!
Ravi

Answer

Date:   Mon, 02 Feb 2004

Hello Ravi,

The excess of the fair market value of the stock over the option price on the date of exercise is taxed as ordinary wages income. The federal withholding rate at the time of exercise is 25%, but the income could ultimately be taxed at up to a 35% income tax rate, depending on your other income and deductions. Other employment taxes like social security and Medicare withholding will also apply. For this reason, I usually recommend that the stock should be sold when the option is exercised.

Tennessee doesn't have an income tax on wages.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.