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jlevy/og-equity-compensation: Stock options, RSUs, taxes — a guide for humans
Equity compensation awards can give rise to federal and state income taxes as well as employment taxes and Medicare surtax charges. We’ll first back up and discuss fundamentals of how different kinds of taxes are calculated.

You must pay federal, state, and in some cases, local taxes on income.
State tax rates and rules vary significantly state to state. Since federal rates are much higher than state rates, you usually think of federal tax planning first.
🔹 In general, federal tax applies to many kinds of income. If you’re an employee at a startup, you need to consider four kinds of federal tax, each of which is computed differently:
Ordinary income tax — the tax on your wages or salary income, as well as investment income that is “short-term”
Employment taxes — Social Security and Medicare taxes that are withheld from your paycheck. The Social Security wage withholding rate is 6.2% up to the FICA wage base. The Hospital Insurance component is 1.45%, and it does not phase out above the FICA wage base.
Long-term capital gains tax — taxes on investment gains that are “long-term” are taxed at a lower rate than ordinary income
Alternative Minimum Tax (AMT) — an entirely different kind of tax that has separate rules and only applies in some situations
Ordinary income tax applies in the situations you’re probably already familiar with, where you pay taxes on salaries or wages. Tax rates are based on filing status, i.e., if you are single, married, or support a family, and on how much you make, i.e. which income bracket you fall under.
As of 2015, there are income brackets at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% marginal tax rates. Be sure you understand how these brackets work, and what bracket you’re likely to be in.
☝️ There is sometimes a misconception that if you move to a higher bracket, you’ll make less money. What actually happens is when you cross certain thresholds, each additional (marginal) dollar money you make is taxed at a higher rate, equal to the bracket you’re in. It looks roughly like this (source).
Investment gains, such as buying and selling a stock, are similarly taxed at “ordinary” rates, unless they are long-term, which means you held the asset for more than a year.
📥 You also pay a number of other federal taxes (see a 2015 summary for all states), notably:
6.2% for Social Security on your first $118,500
1.45% for Medicare
0.9% Additional Medicare Tax on income over $200,000 (single) or $250,000 (married filing jointly)
3.8% Net Investment Income Tax on investment income if you make over $200,000 (single) or $250,000 (married filing jointly)
Ordinary federal income tax, Social Security, and Medicare taxes are withheld from your paycheck by your employer and are called employment taxes.
🔹 Long-term capital gains are taxed at a lower rate than ordinary income tax: 0%, 15%, or 20%. This covers cases where you get dividends or sell stock after holding it a year. If you are in the middle brackets (more than about $37K and less than $413K of ordinary income), your long-term capital gains rate is 15% (more details).
State long-term capital gains rates vary widely. California has the highest, at 13.3%, while other states have none. For this reason, some people even consider moving to another state if they are likely to have a windfall gain, like selling a lot of stock after an IPO.
Alternative Minimum Tax (AMT) is a complex part of the federal tax code many taxpayers never worry about. Generally, you do not pay unless you have high income (>$250K) or high deductions. It also depends on the state you’re in, since your state taxes can significantly affect your deductions. Confusingly, if you are affected, AMT tax rates are usually at 26% or 28% marginal tax rate, but effectively is 35% for some ranges, meaning it is higher than ordinary income tax for some incomes and lower for others. AMT rules are so complicated you often need professional tax help if they might apply to you. The IRS’s AMT Assistant might also help.
❗ AMT is important to understand because exercising incentive stock options can trigger AMT. In some cases a lot of AMT, even when you haven’t sold the stock and have no money to pay. More on this below.
🔹 Section 1202 of the Internal Revenue Code provides a special tax break for qualified small business stock held for more than five years. Currently, this tax break is a 100% exclusion from income for up to $10M in gain. There are also special rules that enable you to rollover gain on qualified small business stock you have held for less than five years. Stock received on the exercise of options can qualify for the Section 1202 stock benefit.
tax  lingotax  money  stockoptions  guide 
7 hours ago by imaginaryfriend
Slide 1 - era101.pdf
Orthodontia Expenses. Gotta confirm prepayment rules.
orthodontic  fsa  money 
10 hours ago by cradock

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