How are you going to get taxed on those stock options that the Railroad gave you?
Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John Mc, mayor of Highball Advisors, and today we're going to talk about those railroaders that got options from their publicly traded Railroad companies and the tax ramifications around them. All right, so we'll get into it, right? So NQSO stands for Non-qualified Stock Options. So you might have that. And what are those? That basically allows the railroader to buy stock at a preset price. It's preset by the company, and it allows the employee to say, you can buy shares in our company at this price. So you've been given the option. Now, usually you would have to stay there, you have vesting things like, hey, you got to be there for at least four years before they become available to exercise, and exercise means that you can sell them and they might expire after 10 years.
So that's kind of the high level, but we're talking about taxes here. So let's talk about what we were thinking about when it comes to taxes. So when you get the grant from the Railroad, here's the options for you're doing a great job. Here's the options, stock options, there's no tax at that, so you can just hold on to them, pay no tax on it. So that's number one. Now, there will be a tax when you say, "Okay, I have these options, and now I want to exercise them." So when they get exercised, they're going to get taxed immediately at ordinary income. So from that preset price to the market price where you exercise them, that's going to be considered income. So now you've exercised them, and then you're also going to have to pay your Railroad retirement and Medicare on that.
So now you have these shares of company, I mean, shares of the Railroad in this company stock. Now there's also, withholding is also done by the company. Because now you have that income, they're going to withhold taxes out of that, and they're going to send it to let the federal government know and let the state know that there's a tax event going on. You have to be very cognizant of what's going on when it comes to taxes. Very important. Then you want to check your withholding amount. Are they taking out enough money? So normally if you're probably getting options, you're in a higher tax bracket, Railroad might be taking it out at 20, I think it's 20 or 22%. So you might have to think about paying estimated taxes on that. Otherwise, there's going to be a penalty for underpayment of taxes.
So check your withholding and then also set money aside. When you exercise the stock. Now that you've exercised the stock, so now you're the owner of the stock, you've paid the taxes on it, you can either sell it or hold onto it. Now, if you sell it right away, that's within less than a year, you're going to have a ordinary income tax on it. Short-term capital gains is taxed at ordinary income rates. So if you sell it right away, if there's any gain from when you acquired it at that new price, the exercise price, you'll have a short-term capital gain on it. But honestly, if you exercise it right away and then sell it right away, there's probably going to be very minimal thing. But now, if you hold the stock for more than a year, right now, long-term capital gains kicked in.
So you've exercised the stock, you've decided to hold onto the stock, and let's say you're going to let it say, "Hey, I really think this company's going to do well." And maybe in five years from now, then you're going to get taxed at long-term capital gains rate, which could be 15% or 20% depending upon your income at that time. So I hope you found this helpful. It's a walkthrough on what to expect when it comes to taxes around non-qualified stock options. Feel free to reach out to me if you have any questions. If you want to go through the boarding for Railroad retirement process, understand how these options are going to especially work around retirement too, what happens to them, that's very important stuff. So click on your notification bell to get the latest video. Subscribe to the YouTube channel. As always, until next time, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.
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