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One Park Place, Suite 3A

Plymouth, MA 02360

(508) 746-4663

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(508) 746-4889

Clients usually inform me around the time taxes are due of major financial decisions, but these decisions were acted upon last year. By this point it is too late for me to advise them about the tax consequences they must now face because they exercised an employee stock option, took an early distribution, or simply received unemployment compensation. Had they come to me before these decisions were put into action, I could have helped them save money in some way or told them to have taxes withheld from these sources of income as to avoid sticker shock at tax season.

If you could potentially have one of these transactions in the near future you should consider setting up a meeting to discuss with me the possible repercussions of the income on your tax situation.

  • Majority of employee stock options are either “qualified” or “nonqualified”, and there is a big difference between the types. Depending on which category stock option you may accept, the gain on the transaction could be treated in several different ways. When you exercise the option, the gain could be treated like ordinary income, or considered a long term capital gain. An employee stock option can also increase taxable income for alternative minimum tax purposes.
  • Early withdrawal from a retirement plan, such as a 401(k), can be considered the equivalent of financially shooting yourself in the foot. Not only do you have to pay taxes on the income, but you also have to pay a 10% penalty if you are younger than 59½ years old. But, if you must access this money early, there are other less costly ways of doing it. There are certain circumstances that you are allowed to make a one-time withdrawal or even withdraw a fixed amount for a few years, or you can take a loan out against your 401(k) with a low interest rate.
  • Most clients usually assume that receiving unemployment compensation will not change their tax situation. But, depending on the other income you earn throughout the year, those unemployment benefits could change your tax rate and cause you to owe more tax than you expected. It may be beneficial for you to withhold taxes from the unemployment income you receive. But, if it will not alter your tax rate, you may just be keeping that much needed income out of your reach until you file your return.

Each client’s tax situation is unique, and needs to be looked at individually to find out what the best course of action is if you are considering one of the transactions described above. For more information about these topics or help with your unique tax situation, please give us a call. We’d be happy to help you understand what impact your financial decisions could have on your next tax return!