How will stock options affect my payroll withholdings?

January 25, 1999

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?



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 non-qualified stock options, request our free report “Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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