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Lesson 10. Taxes and Your Options > Taxes and Nonqualified Stock Options - Pg. 49

Taxes and Your Options 49 When to Exercise Your NSO Option In Lesson 7, "When to Exercise Your Options," I discuss the timing of exercising your options. There are many reasons you may want to exercise your options and sell the stock or exercise your options and hold the stock or do nothing at all. One of the reasons for thinking carefully about when you exercise your nonqualified stock options is the tax implication. As I mention in the first section of this lesson, NSOs do not give you much in the way of tax planning alternatives. One alternative you do have some control over is when you exercise your options. For example, you want to own or control the stock to participate in the hoped-for long-term growth and you are in the upper income tax brackets. You have two possibilities: · Option one: --First, you can simply hold the option if it has a long term and let it become more valuable. · Option two: --Second, you can exercise the option as soon as possible and hold the stock. Which is the better tax strategy? In the first scenario, you can hold the option at no cost to you for as long as the term permits. When you do exercise the option, you will pay ordinary income tax on the spread between the exercise price and the fair market value of the stock. If you are in one of the upper tax brackets, this can be a big bite out of your profit. Some companies allow retirees to exercise their options after retirement, which, assuming a lower tax bracket, could be a big savings. The second scenario may be more appropriate for folks who aren't near retirement. The logic here is to exercise the options as soon as possible, ideally before the spread is large. This means you