Understanding Your Stock Options: The Crescent Guide for High-Achieving Professionals

Many of the successful professionals and executives we work with at Crescent Private Wealth have some form of employer equity compensation, often in the form of stock options. These options can represent a substantial part of a family’s net worth, but they also involve significant tax complexity and strategic planning considerations.
We’ve created this practical overview of the most common types of employer stock compensation and what you should keep in mind when managing them strategically.

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Restricted Stock Units (RSUs): Straightforward Structure, Immediate Tax Impact

RSUs are the most frequently granted type of equity compensation we encounter. While relatively straightforward in structure, they come with one unavoidable characteristic: taxation at vesting.

Here’s how it works: Your employer grants you a certain number of shares. Once those shares vest, the total value becomes taxable as ordinary income, at that moment.

Example: You receive 500 RSUs that vest on September 1st. If the shares are worth $50 each on that date, that’s $25,000 of income you must report, even if you don’t sell a single share.

Key considerations:

• Federal withholding is typically set at 22%, with state taxes varying
• The actual tax due may be higher, potentially creating a shortfall
• Companies may reduce your share count to cover taxes or provide full shares with cash withholding

Strategic consideration: You don’t control when the tax event occurs. It happens automatically at vesting. This requires advance consideration in your overall tax strategy.

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Non-Qualified Stock Options (NQSOs): Flexibility and Strategic Control

NQSOs often provide flexibility when it comes to financial planning integration.

The characteristic: While they have a vesting schedule, you control when to exercise them after vesting, typically anytime up to 10 years from the grant date.

Example: You receive 1,000 options in 2020 at a strike price of $10, vesting in 2023. If in 2025 the stock trades at $20, you can exercise your options and realize $10,000 of profit, taxed as ordinary income at exercise.

Important considerations:

• Default withholding is often 22% federally, frequently insufficient for actual tax liability
• If the stock price falls below your strike price, options can expire worthless
• This risk-reward dynamic is important when evaluating compensation packages

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Incentive Stock Options (ISOs): Potential Benefits, High Complexity

ISOs are less common but may offer unique tax characteristics, when handled properly.

Like NQSOs, they include a vesting schedule and 10-year exercise window. However, if you exercise the options and hold the shares, the difference between your grant price and market value (the “bargain element”) is not taxed as ordinary income.

The complexity: This may trigger Alternative Minimum Tax (AMT), a separate, sometimes significantly higher, tax calculation.

Critical consideration: We often see professionals exercise and hold ISOs without understanding AMT implications, resulting in unexpected five-figure tax obligations months later.

Important note: Consider consulting both a financial planner and qualified tax advisor before exercising ISOs. The potential benefits can be compelling, but the risks can be costly.

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How We Approach This

At Crescent Private Wealth, we work with professionals to explore how equity compensation might integrate into comprehensive financial strategies. We collaborate with tax professionals to model potential scenarios, discuss appropriate withholding levels, and explore exercise timing considerations, all aligned with your long-term goals and values.

Whether you’re navigating RSUs, NQSOs, or ISOs, we believe in turning complexity into clarity through thoughtful planning and strategic exploration.

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Moving Forward

If you or someone close to you holds employer stock options and would like to explore strategic approaches, we’re here to help. We are currently accepting new clients and would be honored to support your financial journey.

Schedule a conversation to discuss how your equity compensation might fit into your broader wealth strategy.

Talk To Us!