After exercising non-qualified stock options, will I owe money next April 15th?

February 28, 2006

Subject:   Requesting your advice
Date:   Sun, 29 Jan 2006
From:   Harsha


I am exercising some non-qualified stock options with a strike price of 50¢ per share and a current fair market value of 70¢ per share. I will have income tax withholding for income of 20¢ per share.

Will I be liable for any additional tax between the exercise date and date of sale?

Will I be liable for more tax based on the value at the end of the year, even if I haven’t sold the shares?



Date:   Wed, 08 Feb 2006

Hello Harsha,

I am assuming your options were priced at the fair market value on the grant date, and so aren’t subject to the new non-qualified deferred compensation rules. I’m also assuming the shares were fully vested or you made a Section 83(b) election for any unvested shares.

Sometimes an additional tax is due on April 15 after the year of exercise because the tax withholding rate (25%) is less than the actual tax on the income (up to 35%).

There shouldn’t be any additional taxable income relating to the shares received until they are sold.

Good luck!

Mike Gray

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.

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