Today TaxMama hears from Sam in New Jersey with this question. “My company did an IPO this year and I will quadruple my income based on my sale of stocks. These were options I exercised years ago, before the IPO. The exercise price was 1/20th of the sales price. How do I minimize my taxes on this windfall?”
Dear Sam,
Well, I’ve got good news for you.
You already did the best thing you could have – you exercised the options and turned the profits from the IPO sales into long-term capital gains.
The current LTCG rates range from 0% – 15% for IRS. (I don’t know what they are for NJ). So your taxes are already relatively low.
What you may want to do – and should have done before selling the shares during the IPO, was to meet with your own tax advisor. There’s a lot of money at stake. You still have time to do some planning.
If you don’t already have someone, you can find a someone terrific by using the Find an Enrolled Agent tool at www.naea.org or the Find a CPA tool buried in Consumer Information at www.aicpa.org .
Someone should sit down with you and look at your overall finances, investments and tax issues to help you take some actions to reduce the tax impact.
Incidentally, you may need to make an estimated tax payment to cover the additional taxes. Of course, if the sale was months ago, you maybe able to change your withholding dramatically for the next few pay periods to make up for this. Your tax advisor can help.
One last note – your sale may qualify for some of the special treatment for gains on Qualified Small Business Stocks. https://www.irs.gov/publications/p550/ch04.html#en_US_publink100010688
Your tax pro may want to take advantage of this for you. Before using it, run the numbers, including the alternative minimum tax, on the transaction. You may be better off not using this tax benefit.
And remember, you can find answers to all kinds of questions about employee stock options and other tax issues, free. Where? Where else? At TaxMama.com.
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