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From:   Russ

I have just cashed in some of my company's stock options through Smith Barney, they withheld tax and sent me a check for the rest. My question is at the end of the year how will that effect my normal payroll withholdings and will all my earnings be taxed at a higher rate since I have cashed them in?

Thanks

Answer

Hello Russ,

The ordinary income and withholding for the stock that you sold will be added to your regular payroll withholding and shown on your W-2 form, issued after the end of the year.

The fact that you had withholding from selling stock should not have any effect on the withholding from your other earnings during the year, unless you instruct your employer otherwise.

Generally, your earnings are not taxed at a higher rate due to the sale of stock. The income from the sale of stock will be taxed at a higher rate than your other earnings, based on the graduated rate schedule.

Sometimes there are other side effects that can increase your tax rate when you have a transaction like this. For example, itemized deductions are phased out for adjusted gross income exceeding $126,600. Contributions to Roth IRAs are phased out for single persons with income between $150,000 and $160,000. Medical deductions may be eliminated because of the 7.5% AGI limit.

I suggest that either you compute your figures or have someone do it for you to know your individual situation, including how much should be paid in to avoid penalties for underpayment of estimated income taxes.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.