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I have until May 1 to exercise stock options (SOP) that will put me into the 39.6% tax bracket this year. My former employer will allow me to withhold at lower rate, 28%. Does it make any sense to try to withhold at the lower rate, invest the difference, then pay the tax out of the proceeds? Or would the 10% underpayment penalty apply?

Can I still income tax average to reduce the impact of this windfall? Any other suggestions on reducing the tax, or do I just bite the bullet?

Thx
Mac
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<<I have until May 1 to exercise stock options (SOP) that will put me into the 39.6% tax bracket this year. My former employer will allow me to withhold at lower rate, 28%. Does it make any sense to try to withhold at the lower rate, invest the difference, then pay the tax out of the proceeds? Or would the 10% underpayment penalty apply?>>

Get the instructions for Form 1040-ES from the IRS and see if you can rely on the previous year's tax liability to figure your estimates. You'll probably find that there is no penalty is you withhold at 28%. Just make sure the proceeds are available when you need to pay the tax.

<<Can I still income tax average to reduce the impact of this windfall? Any other suggestions on reducing the tax, or do I just bite the bullet?>>

Income averaging went out with the 1986 tax act. Unless you can negotiate some kind of deferral arrangement with your employer, you may indeed need to masticate some ammunition.

KAT in Chicagoland
www.fairmark.com
Tax Guide for Investors
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