Planning for a Wild 2017

Contributed by: Kali Hassinger, CFP®

Happy 2017 everyone! A new year is a great opportunity to evaluate your financial wellbeing and set goals for the future.  Some of you may have existing financial plans in place, and others may be thinking that 2017 is the year to take control of your finances.  In either situation, it’s important to understand that financial planning is an ongoing and ever-evolving process. Separate from your personal circumstances, there are many outside forces that affect your financial plan, and there are a few items that may be especially important to evaluate this year.

Given the events of 2016 and possible changes in 2017, the following circumstances could be prime examples of why it’s important to review and update your plan.

• Taxes – With the impending presidency of Donald Trump and the GOP in control of both the House and the Senate, we are anticipating a possible overhaul of the current tax system. For almost all taxpayers, your current tax rate could be reduced.  If the brackets are consolidated as expected, 2017 may be a good year to accelerate taxable income or max out your Roth IRA contributions. You can read more about the proposed tax plans here (http://www.centerfinplan.com/money-centered/2016/12/22/is-tax-reform-coming ).  

• Estate Planning – Just as with taxes, the political landscape of 2017 is set to possibly repeal the current Estate Tax. Because this tax is such a central point for Estate Planning with high net worth individuals, some current estate plans may need to be revised. There is also the possibility that the current gift tax laws may be on the docket for elimination. Although nothing is certain at this point, we will remain up to-date on any changes as they come.

• Allocation – 2016 was certainly a year of surprises for the market. After a decline in January, the shock of Brexit, and Donald Trump’s unanticipated election, the market overcame intermittent volatility and reached all-time highs in November.  Just as no one could predict that the market dip after Brexit would recover so quickly, no one expected the markets to actually go up in the wake of Trump’s election. There is no way to predict the future, but there is a disciplined investing approach that can help you through market uncertainties. With a balanced investment portfolio it is possible to reap the benefits of part of these gains while also insulating yourself from potential volatility. Your balanced portfolio returns may not reach the same highs as the S&P 500, but it can help you reach your goals with proper management over time. 

Regardless of your situation, a new year is always a great opportunity to reorganize and review your goals.  Life can be unpredictable, but not unplannable. We are always here to help, and we encourage you to reach out with questions.

Happy New Year! 

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Kali Hassinger, CFP®, and are not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change. There is no assurance that the statements, opinions or forecasts mentioned will prove to be correct. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against loss. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax or legal issues, these matters should be discussed with the appropriate professional. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note that direct investment in an index is not possible.

Is Tax Reform Coming?

Contributed by: Nick Defenthaler, CFP®

One of the hot topics in the recent presidential election was tax reform. Although both candidates may have had very different ideas of what changes they felt should be made, they did both agree that it was time to move forward with some type of reform. Our tax code is very confusing and many would also add, unnecessarily complex. The last tax reform we’ve had in the U.S was in 1986 – 31 years ago! Coincidentally, this is roughly the same period of time that elapsed between the reforms that were put in place previously in 1954.

Below is a breakdown of some of the proposals both President Elect Trump and the GOP have expressed as we enter 2017:

President Elect Trump:

• Tax Brackets

  • Reduce the number of tax brackets:

    • Currently seven different brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%)

    • Proposal is to reduce the number of brackets to three (12%, 25% and 33%)

• Itemized Deductions and Standard Deduction

  • Consolidate the standard deduction and personal exemptions into a single, larger standard deduction:

    • $15,000 for single filers (compared to $6,300 in 2016)

    • $30,000 for those who are married and file jointly (compared to $12,600 in 2016)

    • Cap the total amount of itemized deductions ($200k for married filers, $100k for single filers)

• Capital Gains Tax

  • Maintain similar capital gains tax rates for the new, proposed brackets:

    • 0% for those who are within the 12% proposed tax bracket

    • 15% for those who are within the 25% proposed tax bracket

    • 20% for those who are within the 33% proposed tax bracket

  • Would eliminate the 3.8% Medicare surtax on net investment income

GOP:

• Tax Brackets

  • Reduce the number of tax brackets – same proposal as President Elect Trump:

    • Currently seven different brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%)

    • Proposal is to reduce the number of brackets to three (12%, 25% and 33%)

• Itemized Deductions and Standard Deduction

  • Eliminate virtually all forms of itemized deductions except for mortgage and charitable deductions, but like President Elect Trump, consolidate the standard deduction and personal exemptions into a single, larger standard deduction:

    • $12,000 for individuals

    • $18,000 for individuals with a child

    • $24,000 for those who are married and file jointly

• Capital Gains Tax

  • Allow individuals to exclude 50% of their investment income – including both capital gains, qualified dividends and even interest income and then tax it at ordinary income rates

    • For example, this would mean if you’re in the 33% proposed tax bracket, investment income would be taxed at 16.5%

  • Would eliminate the 3.8% Medicare surtax on net investment income – same proposal as President Elect Trump

While obviously nothing is set in stone and many of these proposed changes could be blocked by a Democratic filibuster, history has shown that we are more than likely due for some type of tax reform in the near future. Stay tuned!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler, CFP®, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Sources:
http://www.cnbc.com/2016/11/22/how-advisors-are-preparing-clients-for-trumps-tax-plans.html
http://www.forbes.com/sites/kellyphillipserb/2015/10/21/irs-announces-2016-tax-rates-standard-deductions-exemption-amounts-and-more/#28a4d953792e

Restricted Stock Units vs Employee Stock Options

Contributed by: Kali Hassinger, CFP®

Some of you may be familiar with the blanket term "stock options." In the past, this term was most likely referring to Employee Stock Options (or ESOs). ESOs were frequently offered as an employee benefit and form of compensation, but, over time, employers have adapted stock options to better benefit both the employee and themselves.

ESOs provided the employee the right to buy a certain number of company shares at a predetermined price for a specific period of time. These options, however, would lose their value if the stock price dropped below the predetermined price, thus becoming essentially worthless to the employee. As an alternative to this format, a large number of employers are now utilizing another type of stock option known as Restricted Stock Units (or RSUs). This option is referred to as a "full value stock grant" because, unlike ESOs, RSUs are worth the "full value" of the stock shares when the grant vests. This means that the RSU will always have value to the employee upon vesting (assuming the stock price doesn't reach $0). In this sense, the RSU is more advantageous to the employee than the ESO.

As opposed to some other types of stock options, the employer is not transferring stock ownership or allocating any outstanding stock to the employee until the predetermined RSU vesting date. The shares granted with RSUs are essentially a promise between the employer and employee, but no shares are received by the employee until vesting. Since there is no "constructive receipt" (IRS term!) of the shares, there is also no taxation until vesting.

For example, if an employer grants 5,000 shares of company stock to an employee as an RSU, the employee won't be sure of how much the grant is worth until vesting. If this stock is valued at $25 upon vesting, the employee would have $125,000 of compensation income (reported on the W-2) that year.

As you can imagine, vesting can cause a large jump in taxable income for the year, so the employee may have to select how to withhold for taxes. Some usual options include paying cash, selling or holding back shares within the grant to cover taxes, or selling all shares and withholding cash from the proceeds. In some RSU plan structures, the employee is allowed to defer receipt of the shares after vesting in order to avoid income taxes during high earning years. In most cases, however, the employee will still have to pay Social Security and Medicare taxes the year the grant vests.

Although there are a few differences between the old school stock option and the newer Restricted Stock Unit hybrid, these options can provide the same incentive for employees. If you have any questions about your own stock options, please reach out to us!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. This is a hypothetical example for illustration purpose only and does not represent an actual investment.

Webinar In Review: Post Election Update & Year End Planning Opportunities

Contributed by: Center for Financial Planning, Inc.®

The Center's most popular webinar of 2016 was the Post-Election Update and Year End Planning Opportunity presentation. Melissa Joy, CFP®, and Nick Defenthaler, CFP®, break down what President Trump's win may mean for financial markets. They also review areas of financial planning including retirement, taxes, and investments for year-end financial planning opportunities.

Catch a replay of the webinar below. Also, we have a companion year-end planning guide available along with a year-end planning worksheet.

Center for Financial Planning, Inc. is a Registered Investment Advisor and independent of Raymond James Financial Services. Securities offered through Raymond James Fianncial Services, Inc., Member FINRA/SIPC.

Four Considerations for Year End Tax Planning

Contributed by: Nick Defenthaler, CFP®

With the end of the year fast approaching, end of year tax planning is top of mind for many clients. At The Center, we are proactive throughout the entire year when it comes to evaluating a client’s current and projected tax situation but now is typically the time most people really start thinking about it. Let’s be honest, how many of us feel like we don’t pay ENOUGH tax? Most clients want to lower their tax bill and be as efficient with their dollars as possible.

Here is a brief list of items we bring up with clients that could ultimately lead to lowering one’s tax bill for the year:

1. Are you currently maximizing your company retirement account (401k, 403b, Simple IRA, SEP-IRA, etc.)?

   • These plans allow for the largest contributions and are deductible against income.

     • In our eyes, this is often times the most favorable way to help reduce taxes because it also goes towards funding your retirement goals! 

2. How are you making charitable donations? 

   • Consider gifting appreciated securities to charity instead of cash if you have an after-tax investment account with appreciated positions. By doing so, you receive a full tax-deduction on the value of the security gifted to the charity and you also avoid paying capital gains tax – a pretty good deal if you ask me! 

     • Donor Advised Funds are a great way to facilitate this transfer and are becoming increasingly popular lately because of the ease of use and flexibility they provided for those who are charitably inclined.

   • If you’re over the age of 70 ½ and own a Traditional IRA, taking advantage of the now permanent Qualified Charitable Distribution (QCD) could be a great option as well. 

3. Should I be contributing to an IRA? If so, should I put money in a Traditional or Roth?

   • As I always say, in financial planning, there is never a “one size fits all” answer – it really depends on your income and your current and projected tax bracket

     • Keep in mind, not all IRA contributions are deductible, your income and availability to contribute to a company sponsored retirement plan plays a major role.

     • If your current tax bracket is lower than your projected tax bracket in the future, it more than likely makes sense to invest within a Roth IRA, however, as mentioned, everyone’s situation is different and you should consult with your advisor before making a contribution. 

4. Do you have access to a Health Savings Account (HSA) or Flex Spending Account (FSA) at work?

   • These are fantastic tools to help fund medical and dependent care costs in a tax-efficient manner.

     • HSAs can only be used, however, if you are covered under a high-deductible health plan and FSAs are “use it or lose it” plans, meaning money contributed into the account is lost if it’s not used throughout the year. 

This is a busy time of year for everyone. Between holiday shopping, traveling, spending time with family, completing year-end tasks at work, taxes are often times lost in the shuffle.  We encourage you to keep your eyes open for our year-end planning letter you will be receiving within the next few weeks which will be a helpful guide on the items mentioned in this blog as well as other items we feel you should be keeping on your radar.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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Please include the following to all of the above: Please include: The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

How Not to be a Record Hoarder

Contributed by: Sandra Adams, CFP®, CeFT™

If you’re like me, this is the time of year to go through my files and piles of paperwork in preparation for income tax season.  Seeing the stacks of statements and paperwork I’ve collected makes me feel like I’m a prime candidate to be on an upcoming episode of “Hoarders,” because I never quite feel like I can get rid of things…I might need them someday.

Consult with your financial planner and your CPA for discarding any financial or income tax paperwork, and your attorney before parting with legal paperwork.  AND REMEMBER:  you should shred any paperwork with identifying names, addresses, dates of birth or account or Social Security numbers on them to avoid being a potential financial fraud victim.

To ease your mind as you purge your financial records, here are some document retention guidelines:

(CLICK HERE TO DOWNLOAD YOUR PDF COPY)

Bank Statements: Keep one year unless needed for tax records.

Cancelled Checks: Keep one year unless needed for tax records.

Charitable Contributions: Keep with applicable tax return.

Credit Purchase Receipts: Discard after purchase appears on credit card statement if not needed for warranties, merchandise returns or taxes.

Credit Card Statements: Discard after payment appears on credit card statement.

Employee Business Expense Records: Keep with applicable tax return.

Health Insurance Policies: Keep until policy expires, lapses or is replaced.

Home & Property Insurance: Keep until policy expires, lapses or is replaced.

Income Tax Return and Records: Permanently.

Investment Annual Statements and 1099's: Keep with applicable tax return.

Investment Sale and Purchase Confirmation Records: Dispose of sale confirmation records when the transactions are correctly reflected on the monthly statement. Keep purchase confirmation records 3-6 years after investment is sold as evidence of cost.

Life Insurance: Keep until there is no chance of reinstatement. Premium receipts may be discarded when notices reflect payment.

Medical Records: Permanently.

Medical Expense Records: Keep with applicable tax return if deducted on tax return.

Military Papers: Permanently (may be required for possible veteran's benefits).

Individual Retirement Account Records: Permanently.

Passports: Until expiration.

Pay Stubs: One year. Discard all but final, cumulative pay stubs for the year.

Personal Certificates (Birth/Death, Marriage/Divorce, Religious Ceremonies): Permanently.

Real Estate Documents: Keep three to six years after property has been disposed of and taxes have been paid.

Residential Records (Copies of purchase related documents, annual mortgage statements, receipts for improvements and copies of rental leases/receipts.): Indefinitely.

Retirement Plan Statements: Three to six years. Keep year end statements permanently.

Warranties and Receipts: Discard warranties when they are clearly expired. Use your judgment when discarding receipts.

Will, Trust, Durable Powers of Attorney: Keep current documents permanently.

If the hoarder in you is still too nervous to part with the paper, you do have some options:

• Electronically scan your important financial and legal papers and save them to a computer file; remember to back up your computer and save a copy of the list (on a disk or USB flash drive) in a safe place.

• Talk to your financial advisor, who may have an electronic document management system that is storing many of your documents (and backing them up) for you. 

Oh, and while you’re revving up your shredder and getting ready to make some confetti, here’s one more piece of paper to keep…this one.  Go ahead, press print.  Save this guide and you’ll save yourself the trouble of trying to remember it all next year. 

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Non-Qualified Deferred Compensation (NQDC) Plans

Contributed by: Kali Hassinger

A Non-Qualified Deferred Compensation plan (NQDC) is a benefit plan offered by some employers to their higher earning and/or ranking employees. Some of you may have heard of these plans referred to as “Golden Handcuffs” because they often require that an employee stay with their current employer, or at least not move to a competing firm, in order to receive the compensation. This nickname provides both a negative and positive connotation, but, when appropriate, NQDC plans can offer employees greater control over their income, taxes, and financial future.

NQDC plans, unlike your typical 401(k), are not subject to limitations or non-discrimination rules. That means that the employer can offer this benefit to specific employees and there is no restriction on the dollar amount deferred. This is advantageous to an employee who is expecting to be in a high tax bracket, is already fully funding their retirement savings plan(s), has a surplus in cash flow, and may foresee a time when their taxable income will be reduced. With this strategy, the employee and employer agree upon a date in the future to pay the employee his/her earned income. Both parties agree to when the funds will be received in the future, and it isn’t taxable income until it is actually received by the employee.

In most cases, these plans are considered “unfunded” by the employer, which means that the money isn’t explicitly set aside for the employee. This scenario creates a certain level of risk for the employee because the funds would be subject to any future bankruptcy or creditor claims. There are some strategies that the employer can utilize to mitigate the risk (involving trusts and insurance), but they need to uphold the NQDC status. Otherwise, the deferred compensation amount will become fully taxable to the employee along with a 20% penalty. Funded NQDC plans exist as well, and these plans set the deferred compensation assets aside exclusively for the benefit for the employee. Funded plans, however, open themselves back up to ERISA requirements, making them far less popular.  

When an employer and employee enter in a NQDC agreement, it can be a win for both parties.  Employers are securing that valued employees will remain loyal, while employees are able to reduce their taxable income now. 

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Kali Hassinger and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

529 Plans: Saving for your Child’s Education

Contributed by: Nick Defenthaler, CFP®

Doesn’t it always seem like you blink and summer is over? For some reason, this glorious season seems to go by especially fast when you live in the state of Michigan! Hopefully you all took advantage of the hot and sunny weather and had a chance to explore all of the great things our state has to offer with your family. 

If you have children, your focus has probably shifted from weekend getaways to getting back into a more structured routine now that school is back in session.  Since school is top of mind for many, I felt it was a good time to touch on education planning and saving for college. 

Below is a brief refresher of the 529 plan, a popular type of account you can save into for future college expenses.  Many people refer to the 529 plan as the “education IRA” but there are some caveats:

Advantages:

• State tax deduction on contributions up to certain annual limits

• Tax-deferred growth

• No taxation upon withdrawal if funds are used for qualified educational expenses (such as tuition, books, room and board, computers, etc.)

• Parents have control over the account and can transfer the account to another child

• Not subject to kiddie tax rules, unlike UGMA accounts (Uniform Gift of Minors Act) and UTMA accounts (Uniform Transfer to Minors Act)

Disadvantages:

• No guaranteed rate of return – subject to market risk

• Certain taxes and penalties will apply if funds are withdrawn for non-qualified expenses

Items to be aware of:

• Keep records of how money was spent that was withdrawn from the 529 account in case of an audit

• Review the asset allocation/risk profile of the account on an annual basis – typically, the closer the child is to entering college, the more conservative the account should become 

Just like saving for retirement, the sooner you can start saving for college the better. With that being said, if your children are only a few years out from college and your savings isn’t where you’d like it to be, there is still hope. Chances are you still have options and this is where good financial planning can come into play. There are also nuances with financial aid and completing the FAFSA that you want to be aware of—check out our webinar on the topic! If we could provide guidance in this area, don’t hesitate to reach out, we would be happy to help!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler and are not necessarily those of Raymond James. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Asset allocation does not ensure a profit or guarantee against loss.

How to Make Grants from Donor-Advised Funds

Contributed by: Matthew E. Chope, CFP®

I talk to a lot of clients who have set up Donor-Advised Funds or family foundations and are confused. They’ve figured out how to put money in, but how to make grants isn’t always as clear. The IRS prohibits using these funds to satisfy a pledge. That doesn’t prohibit you from supporting organizations like churches, but it does mean you need to follow certain steps.

The first step is to talk to your attorney and your CPA. They can give you tax and legal advice about making a grant. Carla Hargett, the Vice President of Raymond James Trust, told me if you’re planning on giving to your church, for example, she believes the best way to handle the Donor-Advised Fund Grants is to start by discharging any pledge made in the past. Donor-Advised Funds cannot be used to satisfy a pledge. You can let your church know you intend to provide General Support for a certain amount of money and year(s) going forward. The amount can be close to an amount you’ve given in the past – that’s up to you. But any legally enforceable pledges must be cancelled first. This should stop the audit trail if the IRS ever decides to get into the particulars with a grantor. So make sure the grant requests from your Donor-Advised Fund should say something like "2016 General Support.”  

When pledge time comes around, I recommend that you write on the pledge card something like, "I intend to request a distribution of $XXXX.XX from my Donor-Advised Fund during the 20XX fiscal year." Your church or charitable organization will be familiar with this language and can use it for budget planning similar to a pledge.

We just want to make sure that Grantors of donor-advised funds are doing things as accurately as possible and if an IRS auditor someday digs into your grants, you’ll have nothing to worry about.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matt Chope and not necessarily those of Raymond James. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Unpacking Incentive Stock Options

Contributed by: Matt Trujillo, CFP®

What is an ISO?!

Some of you reading this might have been granted Incentive Stock Options (ISOs) in the past or perhaps this is something that your employer recently started to grant you. In either case it never hurts to get a refresher on what they are and some of the nuanced planning opportunities that go with them. ISOs are a form of stock option that employers can grant to employees often to reward employees' performance, encourage longevity with the company, and give employees a stake in the company's success. A stock option is a right to buy a specified number of the company's shares at a specified price for a certain period of time. ISOs are also known as qualified or statutory stock options because they must conform to specific requirements under the tax laws to qualify for preferential tax treatment.

The tax law requirements for ISOs include*:

• The strike price—the price you will pay to purchase the shares—must be at least equal to the stock's fair market value on the date the option is issued.

• To receive options, you must be an employee of the issuing company.

• The exercise date cannot be more than 10 years after the grant.

*Special rules may also apply if you own more than 10 percent of your employer's stock (by vote). Nonqualified stock options, another type of employee stock option, are separate from ISOs therefore receive different tax treatment.

Once you have been granted a stock option, you can buy the stock at the strike price even if the value of the stock has increased. If you choose to exercise a stock option, you must buy the stock within the specific time frame that was set when the option was purchased or granted to you. You are not required to exercise a stock option.

Your options may be subject to a vesting schedule developed by the company. Unvested options cannot be exercised until some date in the future, which often is tied to your continued employment. The stock that you receive upon exercise of an option may also be subject to a vesting schedule.

Assuming that a stock option satisfies the tax law requirements for an ISO, preferential tax treatment will be available for the sale of the stock acquired upon the exercise of the ISO, but only if the stock is held for a minimum holding period. The holding period determines if a sale of the stock you received through the exercise of an ISO is subject to taxation as ordinary income or as capital gain or loss.

To receive long-term capital gain treatment, you must hold the shares you acquired upon exercise of the option for at least:

• Two years from the date you were granted the option, and

• At least one year after the date that you exercised the option

So whether this is something new to you or something you’ve been handling for a long time, feel free to contact us with questions regarding the nuances around Incentive Stock Options.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This information does not purport to be a complete description of Incentive Stock Options, this information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing in stocks always involves risk, including the possibility of losing one's entire investment. Specific tax matters should be discussed with a tax professional.