Post Election Considerations For Employee Stock Options

By Bruce Thompson on January 10, 2025

While the results of the 2024 US election added some clarity on taxes, potential rule and policy changes mean this is a good time to review diversification planning for employee stock options.

Tax-Planning

The 2018 Tax Cuts & Jobs Act (TCJA) is set to expire after 2025, but the Republican sweep of the White House and Congress means it is likely that those tax cuts will be extended or made permanent.

This may afford clients with employee stock options, particularly with RSUs and non-qualified options, a longer timeframe to reach diversification goals while spacing out ordinary income through tax bracket management.

For clients with incentive stock options (ISOs), Lexington advisors will be watching for tax changes which may impact the calculus for diversification strategies. Two potential changes involve indexing capital gains for inflation and rules affecting the calculation of the alternative minimum tax (AMT).

ISOs are treated beneficially for tax purposes. When shares are exercised and held beyond the year of exercise the ordinary income tax is deferred until sale. If the shares are then held long enough, the profit upon sale is treated as capital gain rather than ordinary income.

During his first term, President Trump pushed for a change in IRS rules that would index for inflation the cost basis used to calculate capital gains and losses when shares are sold. This has been a consistent GOP objective and may finally become a reality.  

 For ISOs, at the time of exercise the “spread” (difference between the grant and exercise value) is added back to income for purposes of calculating the Alternative Minimum Tax (AMT) when the shares are held beyond the calendar year of exercise. The 2018 TCJA increased the AMT income exemption amounts, making it less likely for employees with ISOs to trigger the AMT.

Congress is discussing increasing or eliminating the $10,000 cap on itemized deductions for state and local tax (SALT). Many tax experts believe that to pay for a higher SALT cap, Congress may  lower the AMT income exemptions, which could bring the risk of the AMT back into play for some clients exercising ISOs.

Stock-Market Impacts

Given proposals for tariffs, deregulation, and immigration reform, stock option planning may be somewhat industry dependent in the period ahead.  

All else being equal, the backdrop for employees in the energy and financial sectors may be more favorable over the next four years. The backdrop may be more challenging for companies relying on immigrant labor, like hospitality, agriculture, or homebuilding. Tariffs may be a factor, especially in technology sectors that rely on Asian manufacturing.

Deregulation could translate into an increase in mergers, acquisitions, and IPOs – good news for employees in pre-IPO companies who have seen a dearth of liquidity events over the last several years. Accordingly, this may be a good time to evaluate exercising ISOs in private companies, understanding that ISO shares would then need to be held long enough to get capital gains treatment at sale.

In conclusion, the election gives rise to potential new factors affecting the calculus of stock option planning that you and your advisor at Lexington Wealth Management will want to consider.

Managing taxes should always be secondary to considerations of asset allocation, diversification and risk management. Effective tax management is important, yet marginal compared to the significant volatility involved in options and the requirements of your financial goals.

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