Question

Suzanne received 20 stock options (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $13 per share. Three years later, when the share price was $23 per share, she exercised all of her options. Suzanne held the shares for two additional years and sold them when the market price was $30. Her marginal tax rate is 32% and her capital gains tax rate is 15%.

1. Compute her income and tax liability from these transactions assuming that the stock options are ISOs.

2. Compute her income and tax liability from these transactions assuming that the stock options are NQOs.

1. Assuming the stock options are ISOs:

Ordinary income recognized

Capital gain recognized

Total tax liability from these transactions

2. Assuming the stock options are NQOs:

Ordinary income recognized

Capital gain recognized Total tax liability from these transactions

Answer 1

1 If stock are ISO

Computation of cash on exercise date = no of options * no of shares * exercise price

Computation of cash on exercise date = 20 * 20 * 12

Computation of cash on exercise date = $ 4800

Income = (20*20*30) - cash

Income = 12000 - 4800

Income = $ 7200

As Suzanne meets the holding period of 2 years,

Tax liability = income * capital gain tax rate

Tax liability = 7200 * 15%

Tax liability = $ 1080

Net income = 7200 - 1080

Net income = $ 6120

If stock are NQO

Income = (20*20*23) - cash

Income = 9200 - 4800

Income = $ 4400

Tax liability as NQO

Tax liability = income * marginal tax rate

Tax liability = 4400 * 32%

Tax liability = $ 1408

Net income = 4400 - 1408

Net income = $ 2992