Table of Contents Part I Preliminaries 11 Part II Dealing with Company Stock

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1 Table of Contents About This Book 9 Part I Preliminaries 11 1 Equity Compensation Six Categories of Equity Compensation The Central Problem 14 2 Terminology Recipients of Equity Compensation The Company Restricted Stock Awards Terminology for Stock Options Option Vesting Using Stock to Pay the Exercise Price Stock Option Documents 24 3 Your Client s Option Inventory Sources of Information Vital Statistics for Stock Options Other Useful Information 31 Review Questions for Part I 33 Part II Dealing with Company Stock 35 4 Risk Factors Individual Factors Reasons to Hold Company Stock Volatility Individual Stocks Analysis of Individual Stocks Diversified Stock Portfolios Leverage Liquidity Risk Risk in Perspective 47 5 Managing Risk Managing the Portfolio Stop Orders Hedging Transactions Tax Issues in Hedging Managing Your Own Risk 56 3

2 4 Equity Compensation Strategies 6 Securities Laws Lockup Periods Blackout Periods Rule Rule Section Rule 10b Review Questions for Part II 67 Part III Taxation of Stock Investments 71 7 Capital Gains and Losses Basic Rules Equity Compensation and Basis Capital Loss Whipsaws Identifying Shares Sales to Related Persons The Wash Sale Rule Consequences of a Wash Sale Equity Compensation and Wash Sales 85 8 Dividends and Investment Interest Expense Special Rates for Dividend Income Excluded Dividends Day Holding Period Coordination with Capital Gains and Losses Dividends Paid Prior to Vesting Investment Interest Expense 91 9 Tax Planning for Depreciated Stock Terminology Short-Term and Long-Term Losses The $3,000 Capital Loss Limitation Avoiding or Using the Carryover Tax Planning for Appreciated Stock Key Issue Collateral Tax Consequences of Deferral Deferring a Fixed Amount of Income Deferring a Variable Amount of Income Using the Analysis Medicare Tax on Investment Income Overview Rate of Tax 106

3 Table of Contents Taxable amount Net Investment Income Overall Income Planning for Equity Compensation 109 Review Questions for Part III 111 Part IV Stock Received as Compensation Employment Taxes Withholding Social Security Tax Self-Employment Tax Taxation of Stock Awards and Purchases Stock Awards Without Restrictions Buying Company Stock Compensation Income Basis of Shares Categories of Restrictions Vesting and the Section 83b Election General Rules Determining Whether Shares Are Vested Restrictions Relating to Securities Laws Consequences When Shares Are Not Vested Effect of Section 83b Election The Alves Trap Making the Section 83b Election Problems in Making the Section 83b Election Restricted Stock Units Employee Stock Purchase Plans ESPP Terminology Common Plan Designs Nonqualified ESPPs $25,000 Limit Tax Treatment of 423 Plan Participants ESPPs and Wash Sales 150 Review Questions for Part IV 153 Part V Stock Option Valuation and Harvesting Stock Option Valuation Intrinsic Value Time Value 162

4 6 Equity Compensation Strategies 16.3 Elements of Time Value Effect of Increasing Intrinsic Value The Black-Scholes Formula Option Valuation Factors Range of Possible Values Time Value Versus Exercise Price Underwater Options Economic Analysis of Stock Option Harvesting Options in the Money Options About to Expire Exercising Options to Hold Stock Tradeoff When Harvesting to Sell Shares Comparing Intrinsic Value and Time Value Estimating Time Value Client s Financial Condition Harvesting Part of the Option 178 Review Questions for Part V 179 Part VI Nonqualified Stock Options and SARs Taxation of Nonqualified Stock Options Basic Tax Rules Capital Loss Whipsaw Options In the Money; Backdating Early Exercise Stock Option Plans Tax Rules for Share Exchange Stock Appreciation Rights Overview of Stock Appreciation Rights Economics of Stock Appreciation Rights Taxation of Stock Appreciation Rights Tax Strategies for Nonqualified Options Early Exercise for Capital Gain Delayed Exercise for Tax Deferral 200 Review Questions for Part VI 203 Part VII Incentive Stock Options Incentive Stock Option Preliminaries Overview of Tax Benefits The ISO Inventory The $100,000 Limit 211

5 Table of Contents 7 22 Regular Tax Treatment of Incentive Stock Options Receiving or Exercising an ISO Special Holding Period What Is a Disposition Qualifying Sales General Rule for Disqualifying Dispositions Income Limitation Rule Not Available Alternative Minimum Tax Fundamentals Basic Concept of AMT Parallel Tax System Key Elements of AMT Tax Calculation AMT Tax Rates AMT Exemption Amount Phase-out of Exemption Amount Effective Marginal Rate of Tax under AMT Comparison with Regular Income Tax Rates Effective Marginal Rate on Capital Gains Incentive Stock Options and AMT Overview Disposition in Year of Exercise AMT Adjustments Implications of Capital Gain Adjustment Disqualifying Disposition in Subsequent Year Qualifying Sale or Disposition The AMT Credit AMT Credit Overview Available AMT Credit Claiming the AMT Credit AMT Credit Carryover Special Rule for Recovering Old AMT Credit 250 Review Questions for Part VII 253 Part VIII Tax Strategies for Incentive Stock Options ISO Conversion Benefit Conversion Benefit Conversion Benefit Tax Bracket Exercise Price Risk Profile Selling Some of the Shares 267

6 8 Equity Compensation Strategies 27 AMT Cap on Tax Benefit Selling All Shares Holding All Shares AMT credit balancing Eliminating AMT Income from Other Sources Other Income in Later Years Real World Situations Strategies for Holding ISO Stock AMT Risk Bailing Out of AMT Exercising Early in the Year Tax-Free Exercise Late in the Year State Taxes Recovering AMT Credit AMT Credit as an Asset Time Value of Money Alternate Year ISO Exercise Recovering $3,000 Per Year Special Issues in Handling ISOs Using Stock to Exercise ISOs Early Exercise ISO Plan Gifting ISO Stock 300 Review Questions for Part VIII 303 Answers to Review Questions 307 Index 331