by Carolyn Rothwell on February 10, 2017

The Ins & Outs of Stock Options in TOTAL

TOTAL's in-depth planning provides the ability to enter Incentive Stock Options and Non-Qualified Stock Options, including the grant price, strike price, appreciation rate and dates. The financial planning projections determines the cost and value of exercising options and selling stock and reports the amount and type of income subject to taxation. The tax effects will be estimated automatically. Restricted Stock can also be handled in the system by entering an option as a NQSO and setting the strike price as $0.

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Planning Data - Entering Stock Options

Entering stock options that have been granted (or are slated to be granted in the future) allows the software to include the cash and tax effects of exercising and selling the stock options in the client's financial planning projection. In the online edition, stock options are added in Assets by choosing the group of Stock Options.  In the desktop edition, Stock Options is a separate data entry section available on the left side menu.


  • Enter the current share price, and an expected rate of return.
  • For each grant, select the [Type] of [Incentive Stock Option] or [Non-Qualified Stock Option] and enter the number of shares granted.
  • Set the [Grant (Strike) Price], [Grant Date] (dates in the future are fine), and [Vesting Date]. Breaking up grants based on the vesting schedule works well. If the client's have more than the limit of 18 grants for a stock option type, it may be required to enter a single grant and set the vesting date when the client would be 100% vested. 
  • Set the [Exercise Date] and [Exercise Method]. Assumptions may need to be made for the exercise date and method. Leaving the exercise date or method blank means the stock option will not be exercised and not included in the projection.
  • [Exercise Method] includes:
    • [Sell all] - sells all stocks at time of exercise
    • [Sell part] - sells only enough stock to cover the exercise cost
    • [Hold All] - which doesn't sell any stock upon exercise and any exercise cost will be an expense the client has to cover from other sources
  • Enter the [Sales Date]. A date is required (the only exception is when the exercise method is to sell all). The shares will be sold at the date set, causing the cash flow (and taxable income) related to the stock sale to come into the client's financial planning projection.  
More details about entering stock options:
Items to note of when entering stock options:
  • There is a limit to the number of stock options that can be included in the projection of 18 ISO and 18 NQSO.
  • Dates are required. If no exercise date is entered, the stock options will not be exercised. If no sales date is entered, the stock options will not be sold (unless sold upon exercise.) No cash or tax effects from the sale will be included in the projection without dates. 
  • The stock option worksheet included in the client's financial plan is NOT intended as a complete analysis or as an optimizing program for stock options.
  • Stock options in TOTAL do not:
    • Include specific state tax treatment.
    • Determine or illustrate withholding tax requirements.
    • Attempt to determine the best time to exercise or sell shares (the planner enters the anticipated exercise and sell dates.)
    • Allow the appreciation rate on the shares to change during the projected period (a single fixed appreciation rate is used).

 Tax Effects of Exercising & Selling Stock Options

Below is a helpful flowchart to illustrate the tax impact of exercising and selling ISO and NQSO income. Money Tree's support team frequently refers to this flow chart to help answer questions about the taxation of stock options. 



TOTAL handles stock options taxation automatically. Golden Years includes any income subject to taxation with the client's detailed income tax analysis. Easy Money calculates the cost of taxes based on the client's current marginal and capital gains tax rate (unless an optional tax rate is entered on the stock option input.) 

Stock Option Reports in TOTAL

The reports capture the tax and cash effects of exercising and selling stock options.  The Stock Option Summary (B9 in Easy Money & C14 in Golden Years) provides a summary of the cash impact of exercising and selling shares, and the amount and type of income reportable for taxes. The supporting Stock Options Worksheet provides a detailed breakdown of each stock option's actions, cash and tax impacts. 


TOTAL's Goal-Based Reports - Easy Money:

Easy Money, with its conservative goal-based planning method, uses the client's marginal tax rate to estimate the taxes due. The net after-tax income or expense from exercising and selling the stock options flows into the Retirement Capital Estimate (C6) in the Other Income/Expense column. 


TOTAL's Cash-Flow-Based Reports - Golden Years:

Golden Years, with its full cash flow and tax analysis, displays the cash flow impact from exercising and selling shares. The cash flow impact carries over to the Cash Flow Illustration (B7 as other income when selling stock, B8 as other expense for exercising without selling.)  The income reportable for taxes flows to the Taxable Income Analysis (D7) and any AMTI income to the AMT Worksheet (D12), and is included in calculating the client's tax expense. 


The stock options are easy to track quickly using the report audit trails where every number can be broken down and reconstructed.

Data Input - Field Description

Tax Rates (For Easy Money Only) - Optional tax rates can be provided by the planner to override the marginal and capital gains tax rate calculated by the program based on the client's current year income tax analysis. 

Ordinary Income Tax Rate Before Retirement - Use this field to enter an alternative ordinary income tax rate to use before retirement. This rate will then be used to tax the ordinary income portion of the stock option gains. If this field is left blank, the ordinary income tax rate calculated for the first year will be used.

Ordinary Income Tax Rate After Retirement - Use this field to enter an alternative ordinary income tax rate to use after retirement. This rate will then be used to tax the ordinary income portion of the stock option gains. If this field is left blank, the ordinary income tax rate calculated for the first year will be used.

Capital Gains Tax Rate - Use this field to enter a capital gains tax rate that will be used to tax the capital gains portion of the stock option gains.

AMT Tax Rate - Use this field to enter an AMT tax rate that will be used to tax the AMT portion of the stock option gains.

Add Company Button - Click this button to enter a new company. Company Information is required before adding Options for the company.

Company Information Section - This section of the input window contains general information that applies to all options.

Name - This is the name of the company issuing the stock option. Multiple companies can be entered, but are still limited to 18 total ISO and 18 total NQSO grants.

Current Date - Today’s date or the date you wish to use for the starting price of the shares (for computing future values at exercise or sale date.)

Current Price Per Share - The current market price for the shares.

Annual Appreciation Rate - The rate you are assuming the price will increase each year until exercise or sale takes place. The program asks for the date when events will take place, the actual appreciation is computed on a monthly compounding basis.

Grants Section - This section allows multiple options to be added. Use the "ADD" button to open a blank window and add an option. Use the "DELETE" button to delete an option for any reason. There no limit to the number of entries that are allowed.

Type - Determine the type of option and check the appropriate box. It is important to have properly identified the type. It may be necessary to review the document issued by the company to verify the type. It is not unusual for an employee to know he or she has an option, but still be unclear as to the type.

ISO: Incentive Stock Options - This type of option is issued under specific IRS guidelines. When shares are ultimately sold, they may qualify for capital gains treatment rather than ordinary income. In order to qualify the exercise must take place no less than 12 months after the grant is issued, and the sale must take place at least 12 months after exercise and no less than 24 months after the grant was issued.

NQSO: Non-Qualified Stock Option - When these options are exercised the employee must report the bargain element (the value of the shares purchased in excess of the exercise cost) as ordinary income in the year exercised. This is true even if the client has not sold any of the shares and realized any cash results.

Number of Shares - The option will specify the number of shares that may be purchased upon exercise of the option. In some cases, the option will have "staged" vesting dates. In other words, the option may be for 1,000 shares, but the employee may only exercise 250 shares each year over a period of 4 years. When entering a staged option exercise you should enter each exercise date as a separate entry. In other words, in the example above, you would make 4 entries, each one with the same grant date, but with the exercise dates shown at the time that group of shares will be exercised.

Grant (Strike) Price - The option terms will specify the price that the employee must pay for the shares when purchased. An ISO will have a price that equals the current market price when the option is issued. An NQSO may be issued with any price the company selects.

Grant Date - This is the date when the company issued the option to the employee specifying the "Strike" or "Exercise" price (the cost to the employee when the shares are bought), the dates when the options vests (or is available to purchase), and other terms. This date will be found on the employees Option paperwork.

Vesting Date - This is the date when the employee may first make the purchase (exercise the option to purchase shares.) In some cases the company may allow an "Early Exercise" so the client can make the purchase prior to the date listed in the option.

When entering the Vesting Date, make sure the "Exercise Date" is not earlier than the Vesting date. The program orders the ISO’s based on the Vesting Date in order to check for disallowed ISO options where the amount exceeds $100,000 in a single year. If the client has an option allowing an early exercise (prior to the stated vesting date), enter the Vesting date and the Exercise both at the date when the exercise will take place.

Exercise Date - This is the date when the client intends to exercise the option. It should be no earlier than the Vesting date (see note above.) At this date the client will be required to pay for the shares purchased. "Exercise Method" below explains methods the client might use for exercising and paying for the shares. An exercise data must be entered in order to operate.

Exercise Method - The program includes three automatic methods for handling the shares upon exercise:

  • Sell All Shares - When the exercise takes place the client will immediately sell all shares. The exercise cost will be paid from the proceeds of the sale. The bargain element (difference between the market price of the shares and the exercise cost) will be treated as ordinary income.
  • Sell Part of the Shares - The program will determine the number of shares that must be sold to have enough funds to pay for the exercise cost (in full shares). The remaining shares will be held until the sale date entered. When this option is used.
  • Hold all Shares - No shares are sold upon exercise. The client must pay for the cost of exercise with other personal funds.

Sale Date - Enter the date when the client anticipates selling the shares that were purchased by exercising the option. This may be the same sale date as the exercise or a later date. Remember a sale taking place before 12 months will not qualify for capital gains treatment on the appreciation occurring after the exercise. A sale date must be entered in order to operate.

The program will compute the holding period from the exercise date until the sale date and determine if the shares were held 12 months or more. An exercise on January 15 of the current year and sold on January 15 of the next year will be treated as LESS than one year, so be sure to include one day past the exercise date to make sure that the LTCG treatment is available. The program recognizes leap years, so a date on January 15 of the current year and January 15 of the next year may qualify if it includes a leap year.

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.