/equity-compensation

name: equity-compensation
description: "Guides equity compensation planning for wealth management clients: RSU vesting and the supplemental-withholding gap, NSO and ISO exercise taxation, AMT on ISO spreads and the AMT credit, qualifying vs disqualifying dispositions, 83(b) elections for restricted stock, qualified Section 423 ESPPs, and managing concentrated employer stock (staged diversification, exchange funds, protective collars, charitable strategies, Rule 10b5-1 trading plans, Section 16 insider constraints). Use when the user asks about stock options, RSUs, ESPP purchases, or trading windows — e.g. 'my RSUs vested', 'should I exercise my ISOs', 'will I get an AMT hit', 'file an 83(b) election', 'disqualifying disposition', 'set up a 10b5-1 plan', 'I have too much company stock', or questions about selling employer shares as an executive or insider."

Equity Compensation

Core Concepts

Restricted Stock Units (RSUs)

RSUs are a promise of shares delivered at vesting. There is no election to make and no exercise decision:

• **Taxation:** Full FMV of shares at vest is ordinary income (W-2 wages), subject to income tax, Social Security (up to the wage base), and Medicare. Cost basis = FMV at vest; holding period starts at vest.
• **Withholding shortfall trap:** Employers withhold federal tax on RSU income at the flat supplemental wage rate — 22% on supplemental wages up to $1 million cumulative for the year, with a mandatory 37% rate on the excess above $1 million (rates as of 2026, tied to statutory brackets — verify current). A client whose actual marginal rate is 32-37% is systematically under-withheld and can face a large April balance due plus underpayment penalties. Plan estimated payments or extra withholding in vest years.
• **Post-vest decision:** Holding vested RSU shares is economically identical to buying employer stock with a cash bonus. The default recommendation is sell-at-vest unless there is a deliberate concentration thesis; there is no tax benefit to holding beyond starting the capital gains clock.

Nonqualified Stock Options (NSOs)

• **At exercise:** Spread (FMV − strike) × shares is ordinary income (W-2 for employees), with payroll tax and withholding. Basis = FMV at exercise; subsequent gain/loss is capital.
• **No AMT preference** — NSO taxation is entirely in the regular system.
• Exercise timing is a bet on rate arbitrage and appreciation: early exercise moves future appreciation from ordinary income to capital gains but accelerates tax and concentrates risk.

Incentive Stock Options (ISOs)

• **At exercise:** No regular-tax income. The spread (FMV − strike) × shares is an AMT preference item in the exercise year (unless the shares are sold in a disqualifying disposition in that same calendar year, which eliminates the AMT adjustment).
• **Qualifying disposition:** Sale more than 2 years from grant AND more than 1 year from exercise. Entire gain over strike is long-term capital gain.
• **Disqualifying disposition:** Either holding test fails. Spread at exercise (capped at actual gain if the stock declined) becomes ordinary income in the year of sale; any gain above FMV-at-exercise is capital gain (short- or long-term by holding period from exercise). No payroll tax on the ordinary portion.
• **$100,000 ISO limit:** Aggregate grant-date FMV of ISOs first exercisable in any calendar year cannot exceed $100,000 (IRC 422(d)). This is a statutory figure and is NOT inflation-indexed. The excess is treated as NSOs.
• ISOs must be exercised within 3 months of termination (12 months for disability) to retain ISO status.

The AMT Mechanism and AMT Credit

The alternative minimum tax is a parallel tax computation. Simplified flow:

1. Start with regular taxable income, add back preference/adjustment items (the ISO spread is the dominant one for equity-comp clients) to get AMTI. 2. Subtract the AMT exemption — an inflation-indexed amount (in the low-to-mid $130,000s for MFJ as of recent years — verify the current figure) that phases out above a high AMTI threshold (thresholds and phaseout rate were changed by 2025 tax legislation effective 2026 — verify current parameters before advising). 3. Apply the two AMT rates: 26% up to an indexed breakpoint (roughly the low $200,000s of AMT base — verify current) and 28% above it, giving the tentative minimum tax (TMT). 4. AMT due = max(0, TMT − regular tax). The client pays the higher of the two systems.

**AMT credit:** AMT paid on *deferral* items (like the ISO spread) generates a minimum tax credit carried forward indefinitely, usable in future years when regular tax exceeds TMT. The ISO AMT is largely a prepayment, not a permanent cost — but the credit can take many years to recover. Shares exercised also get a higher AMT basis (FMV at exercise), so a later qualifying sale produces a smaller AMT gain, helping unlock the credit.

**Planning levers:** Exercise early in the year (option to disqualify before Dec 31 if the stock collapses — the classic dot-com trap was owing AMT on vanished paper gains); exercise only up to the "AMT crossover" amount where TMT just equals regular tax; spread exercises across years.

83(b) Elections (Restricted Stock, Not RSUs)

For restricted *stock* (including early-exercised options), Section 83(b) lets the holder elect to be taxed at grant/early-exercise on (FMV − price paid) rather than at vesting:

• **30-day deadline from the transfer date — statutory, no extensions.** File with the IRS and give a copy to the employer.
• Converts all post-grant appreciation to capital gain and starts the holding period immediately. Most valuable when current spread is near zero (founder stock, early exercise at strike = FMV).
• **Risk:** Tax paid is not refundable if the shares are later forfeited; no deduction for the forfeited income (only a capital loss for actual amounts paid).
• RSUs are not eligible — there is no property transferred at grant.

Employee Stock Purchase