Executive pay rarely comes down to a single number on a paystub. It’s a mix of base salary, bonuses, RSUs, ISOs or NSOs, deferred compensation, and, for some, severance or change-in-control payouts—often earned while working across more than one state. That complexity creates real tax exposure: withholding gaps that surface at filing time, AMT liability on stock you haven’t sold, and excise taxes that only appear during a transaction.
A standard tax-prep approach, built around filing last year’s return, isn’t designed to catch these issues before they cost you money. The traps below tend to repeat across executive compensation packages, and each one is manageable with the right planning window. Here’s what to watch for, and how proactive planning addresses each one.
Table of Contents
The Withholding Gap on RSU Vests
When restricted stock units (RSUs) vest, the IRS treats the value as supplemental wages. Per IRS Publication 15, employers withhold a flat 22% on the first $1 million of supplemental income in a calendar year, then 37% on anything above that threshold.
That flat rate rarely matches what an executive actually owes. Consider a $260,000 salary combined with a $180,000 RSU vest, for a total of $440,000. Under 2026 tax brackets, that income lands in the 35% marginal bracket, well above the 22% withheld at vesting. That’s roughly a 13-point gap on the vested amount, or close to $23,400 in under withheld federal tax, before state tax is layered on.
The fix is straightforward:
- Adjust your W-4 withholding, or
- Make quarterly estimated payments to close the gap before you get hit with a penalty.
Some companies now allow employees to elect 37% withholding at vesting, which can suit executives who’d rather pay the difference out of pocket than sell additional shares to cover taxes.
RSU income is just one piece of the picture. Ongoing planning around compensation timing, alongside your other income sources, is where LTax’s individual tax planning come in.
The AMT Trap on ISOs
Incentive stock options (ISOs) create a different, and often larger, exposure than RSUs: the Alternative Minimum Tax (AMT).
Under IRC §422(a)(1), how an ISO is taxed depends on whether the eventual sale is a qualifying or disqualifying disposition, which hinges on specific holding-period requirements. But the AMT issue arises earlier, at exercise. When you exercise an ISO, the spread between the exercise price and the stock’s fair market value is treated as an AMT preference item, even if you haven’t sold a single share.
That creates a liquidity mismatch:
- You may not want to sell to preserve favorable long-term capital gains treatment or avoid a disqualifying disposition.
- Yet you still owe AMT on a gain that exists only on paper.
For example, for a single taxpayer with a $200,000 salary and a $500,000 exercise spread, the spread could push AMT income into the 28% bracket. Based on these assumptions, the exercise would create an estimated $154,376 in additional tax exposure. This would bring the total federal income tax bill to approximately $191,110, even though the stock appreciation hasn’t converted to cash.
There’s often a specific number of shares you can exercise before triggering incremental AMT liability, sometimes called the AMT “breakeven.” Identifying that number requires modeling your full income picture, which is exactly the kind of analysis worth having before exercise, not after.
This calculation matters even more given the AMT exemption phase-out for high earners. For 2026, the exemption begins phasing out at:
- $500,000 for single filers
- $1,000,000 for married couples filing jointly
As income climbs, the shelter available shrinks. LTax’s stock option analysis, part of our broader executive compensation consulting, is designed to model these scenarios before you exercise.
Concentration Risk
Beyond the tax mechanics of any single grant, many executives end up with a disproportionate share of their net worth tied to one company’s stock. That’s both a portfolio risk and a tax planning problem. Diversifying your stock concentration triggers capital gains, so the fix can carry its own tax cost.
When your paycheck and a large share of your net worth are tied to the same ticker, a downturn or job loss compounds the impact in ways a diversified portfolio wouldn’t. For executives and insiders, though, diversifying isn’t as simple as placing a trade whenever the timing feels right.
Selling as An Insider: 10b5-1 Plans
Rule 10b5-1 governs when and how you can sell company stock.
Who this applies to: officers, directors, 10% owners, or anyone with regular access to material non-public information. If none of those descriptions apply to you, this section likely doesn’t affect your equity compensation planning.
If you are subject to it, insider status means you can’t decide to sell shares whenever it’s convenient. A 10b5-1 trading plan, created in advance and executed on a set schedule, provides a path to diversify holdings without violating insider trading rules.
The SEC’s 2023 amendments added a cooling-off period:
- Directors and officers: the later of 90 days after the plan is adopted or modified, or two business days following the filing of the next Form 10-Q or 10-K (capped at 120 days).
- Non-officer insiders: a 30-day cooling-off period.
In short, a properly structured 10b5-1 plan is the compliant way to reduce concentration risk over time. Founder-executives navigating a similar situation may also find this relevant alongside our services for entrepreneurs.
Deferral Elections that Lock in for Years (409A)
Non-qualified deferred compensation (NQDC) plans let executives defer a portion of income to a future year, but the election window closes earlier than most people expect. Most plans require the election before the end of the current calendar year for compensation to be earned in the year that follows. This is a forward-looking decision, not a year-end scramble.
Get it wrong, and IRC §409A imposes a steep cost:
- A 20% penalty
- Immediate income inclusion, even though the compensation hasn’t been paid yet
There’s also a subtler trap. Many executives accept whatever default distribution option their plan offers, rather than modeling how that timing fits their broader income picture. A default election made without context can create a large taxable event in the wrong year. This is where LTax’s proactive, collaborative planning makes a measurable difference. See how a similar approach has played out in our client success stories.
Trailing Equity After a Move
Relocating to a state with no income tax doesn’t necessarily erase a prior state’s claim on your equity compensation. Many states, including California, apply workday-based sourcing: equity earned between the grant date and the vest date is apportioned based on where you actually worked during that period. Per California’s Franchise Tax Board Publication 1004, that means a move to Texas or Washington doesn’t retroactively exempt income tied to the time you spent working in California.
The stakes here can be significant. In Appeal of Prince, California’s Office of Tax Appeals addressed how nonresident income from restricted stock should be sourced, and the case has been cited for a striking figure: roughly 53.16% of an executive’s equity income was sourced to California despite the individual’s move out of state. Numbers like that illustrate how much exposure can trail an executive well after relocation.
This is a genuinely underserved area of executive tax planning, and it’s where our State Relocation Guides are designed to help you model sourcing exposure before a move, not after the equity has already vested.
The $0 Cost-Basis Error
Here’s a trap that’s easy to miss and expensive to ignore. 1099-Bs often report a $0 or understated cost basis on vested RSU and ESPP shares. If you don’t adjust for this on your return, you risk paying tax twice on income you’ve already recognized.
The distinction matters:
- RSUs: typically show a $0 basis because no purchase price was ever paid; the shares themselves were the compensation
- ESPP and non-qualified stock option (NSO) shares: do carry a basis component tied to the purchase or exercise price, along with ordinary income you’ve already reported. That portion is frequently missing from the 1099-B altogether.
The takeaway: don’t take your 1099-B at face value. Review it against your equity records before filing.
280G in An Acquisition
If your company is acquired, a golden parachute excise tax may apply to payments contingent on the change in control.
Here’s how it works:
- Total parachute payments exceed three times your “base amount,” generally your average W-2 compensation over the preceding five years.
- Once payment exceeds three times your base amount, the excess is subject to a 20% excise tax, layered on top of ordinary income tax.
The only real opportunity to address this is before a deal closes. Once the transaction is signed, the options for restructuring payments narrow considerably. If M&A conversations are underway, that’s the moment to bring in pre-transaction planning, not after terms are finalized.
Turn Awareness Into a Strategy
Every trap covered here, including RSU withholding, ISO-driven AMT, multi-state sourcing, and 280G exposure, eventually lands in the same place: your personal tax return. No single party in the compensation chain, from your employer and your broker to your plan administrator, is responsible for catching these issues before they cost you money. That responsibility, and the opportunity to plan around it, falls to you.
When you’re ready to talk through your executive compensation plan, we can help you build a strategy tailored to your equity, your income timeline, and your broader financial goals. Contact an LTax team member to learn how we help you navigate complex compensation.
Frequently Asked Questions
Are bonuses still taxed at 40%?
Bonuses are not taxed at a 40% tax rate. Currently, bonuses paid separately from your standard income are subject to a 22% federal supplemental withholding rate for amounts up to $1 million, and 37% on amounts above that threshold. However, your actual tax liability depends on your total income for the year. If your marginal rate exceeds the withholding rate, you may owe additional tax at filing.
What is the alternative minimum tax (AMT), and how could it affect my stock options?
The AMT is a parallel federal tax calculation designed to ensure that higher-income taxpayers pay a minimum level of tax. Certain deductions and income items are treated differently under the AMT rules. For executives with incentive stock options (ISOs), the spread between the exercise price and the stock’s fair market value is generally included in AMT income at exercise, even if the shares have not been sold. This can create a significant tax bill without generating cash to pay it, making it important to model potential AMT exposure before exercising ISOs.
How much should I expect to owe in additional tax on RSU vests beyond what’s withheld?
The amount depends on your total income for the year, but the standard 22% supplemental withholding rate frequently falls short of your actual marginal rate. Executives with total income above roughly $256,225 (single filers, 2026) fall into the 35% bracket or higher, creating a withholding gap that often requires estimated payments to avoid an underpayment penalty.
What is the difference between an ISO and an NSO?
Incentive stock options (ISOs) are generally available only to employees and may qualify for favorable long-term capital gains treatment if specific holding-period requirements are met. However, exercising ISOs can trigger the alternative minimum tax (AMT). Nonqualified stock options (NSOs), also called NQSOs, may be granted to employees, directors, contractors, and advisers. With NSOs, the spread between the exercise price and the stock’s fair market value is generally taxed as ordinary income at exercise. The option type affects not only how and when you are taxed, but also how you may want to plan the timing of an exercise or sale.
