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Lesson 5. Incentive Stock Options - Pg. 21

21 Chapter 5. Incentive Stock Options In this lesson, you will learn what an incentive stock option is and how it differs from other employee stock options. Incentive Stock Options Defined Incentive stock options (ISOs) are a type of employee stock option that may receive special tax treatment. They are favored as incentives for highly paid employees for the potential tax savings. ISOs achieve tax savings by meeting the fairly strict requirements outlined in the tax code. Basically, ISOs shift the tax on options from ordinary income, as is the case with nonqualified stock options, to capital gains tax. The current capital gains tax rate is 20 percent, considerably lower than the normal ordinary income tax rate for highly paid individuals. The second lowest income tax bracket is 28 percent.