Why Exercising Non-Qualified Stock Options (NSOs) Now May Be Beneficial

Remember how in our last blog post, we discussed the benefits of converting pre-tax money in your IRAs or 401(k)s to a Roth account due to lower tax rates currently? Well, the same logic applies to the idea of exercising non-qualified stock options (NSOs).

When you exercise an NSO, you immediately owe income tax on the “spread” between the exercise price and the value of the stock. This means that by exercising NSOs now, you could potentially incur taxable income at lower tax rates than in the future if the Tax Cuts and Jobs Act (TCJA) expires.

For example, if you exercise multiple NSOs at a low exercise price compared to the stock value, the taxable income generated could be significant. By looking at the current tax brackets and rates versus what they may be if the TCJA expires, you can see the potential tax savings by acting now.

FAQs

1. How do I determine if it is beneficial for me to exercise NSOs now?

You will need to calculate the potential taxable income generated by exercising your NSOs at current tax rates versus what it would be if tax rates increase post-TCJA expiration. Consult with a financial advisor to run the numbers for your specific situation.

2. Are there any risks involved in exercising NSOs early?

Exercising NSOs early may result in immediate tax consequences, so it is essential to consider your overall financial situation and future tax implications before making a decision.

Conclusion

Exercising non-qualified stock options now can be a strategic move to take advantage of lower tax rates before they potentially increase in the future. By calculating the potential tax savings and considering your individual circumstances, you can make an informed decision on whether exercising NSOs early is beneficial for you.