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ISOs offer employees certain tax benefits and are subject to qualification requirements under the Internal Revenue Code. free tax programs Federal inheritance tax. (1) Among other things, ISOs are subject to a general prohibition against transfer, although ISOs may be transferred to an employee''s beneficiaries (including the employee''s estate) upon the employee''s death. (2) An option that is transferred (or transferable) during the employee''s lifetime, whether by its original terms or by subsequent amendment, will not qualify as an ISO but will instead be treated as an NSO for tax purposes. Even though NSOs are not subject to the ISO nontransferability limitation, many stock option plans contain restrictions on transfer similar to those that apply to ISOs. free tax programs Nys tax forms. Employers that do allow employees to transfer their options generally do so on a restricted basis by, for example, limiting option transfers to the employee''s family members or to a family trust. ESTATE TAX CONSIDERATIONSIf an employee dies holding unexercised employee stock options, the value of the option at the time of death (i. e. free tax programs File online taxes. , the difference between the fair market value of the shares and the option exercise price) will be included in the employee''s estate and subject to estate tax. (3)Typically, following the employee''s death, the options may be exercised by the executive''s estate or by his or her heirs. In either case, the income tax consequences upon exercise after the employee''s death depend on whether the option is an ISO or an NSO. In the case of an ISO, exercise will not generate taxable income and the purchased shares will have a tax basis that "steps up" to their fair market value at the time of the executive''s death. (4) A subsequent sale of the shares will generate capital gain or loss. In the case of NSOs, exercise will trigger ordinary income measured as the difference between the fair market value of the shares at the time of exercise and the option exercise price, subject to a deduction for any estate tax paid with respect to the NSO. There is no step up in the tax basis as the result of the employee''s death. (5)As mentioned above, however, ISOs are not transferable during the employee''s lifetime. Since ISOs do not present the same estate planning opportunities as NSOs, this discussion is limited to the transferability of NSOs (including ISOs that become NSOs as a result of an amendment to permit transferability or as a result of an actual option transfer). A transfer of employee stock options out of the employee''s estate (i. e. , to a family member or to a family trust) offers two main estate planning benefits: first, the employee is able to remove a potentially high growth asset from his or her estate; second, a lifetime transfer may also save estate taxes by removing from the employee''s taxable estate the assets that are used to pay the income and gift taxes that result from the option transfer. At death, estate taxes are computed on the basis of the decedent''s gross estate prior to the payment of taxes. In other words, estate tax is paid on the portion of the estate that is used to pay estate taxes. For example, if the decedent''s taxable estate is $1 million and the estate tax is $300,000, the estate will have paid estate taxes on the $300,000 used to pay the tax. By removing from the decedent''s taxable estate assets that will otherwise be used to pay the tax, only the "net" value of the decedent''s estate is taxed at death. If the employee transfers options and incurs gift and later income taxes as a result (discussed below), the ultimate estate tax burden is reduced. GIFT TAX CONSIDERATIONSA transfer of property by way of gift is subject to the gift tax rules. These rules apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. (6) For gift tax purposes, an option is considered property. (7)Valuation.
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