Often employees who are permitted to buy company stocks at a set price for a specified time are concerned about taxes.
However, 2021 might not be a great year for stock earnings. You can accelerate your stock-based income in the next months before the year ends.
For instance, you can either sell stocks to lock in current prices or buy non-qualified stocks, a type of stock option that affects income tax when bought.
However, financial experts recommend considering various aspects before making any move in the stock market.
“There are a lot of moving parts, depending on the type [of stock options] you have, tax implications and other personal scenarios,” – suggests Daniel Zajac, financial planner, and partner at Zajac Group in Exton, Pennsylvania
Non-qualified stocks allow employees to buy company stocks at a reasonable price and sell out when the selling prices seem attractive to them.
However, here is a downside. When employees perform the so-called “exercise”, they owe income taxes on the “bargain element”, the difference between the selling price of a stock and exercise price. This may create a beefy tax bill for the employees.
“People are very aware that it is a taxable event,” stated Kristin McKenna, the managing director, and CFP at Darrow Wealth Management, Boston. She also added, “They are not aware that withholding is done at these flat rates, and it’s probably not enough.”
Before exercising stock options, employees should consider whether the act is aligned with their financial goals. Since everything comes at an opportunity cost, spending a large amount on a single company’s stocks and spending money in advance can be risky.
Chelsea Ransom-Coope, the managing partner at Zenith Wealth Partners, asked, “How do you feel being an owner and a shareholder of this company right now?”
She said, “The biggest thing that I remind clients is it’s not all or nothing”.
Selling company stocks might be a viable way to boost income in 2021; however, experts often consider more than income taxes when deciding to unload shares.
According to Zajac, “Tax is just one part of the equation,” people sell stocks either to fund their other financial goals or to diversify their portfolios. Also, selling incentive stock options will only add up to complexity.