Going through a divorce is often difficult for couples in New York and elsewhere. If you have stock options from your employer that are doing very well, it can be even more stressful as you have to split these assets with your spouse. It’s important to know how the stock options are divided.
What is the general rule of dividing employer stock options?
There is a notable benefit for you if you are the one who has the employer stock options. The general rule is that these assets in a high-net-worth divorce are treated as gifts when transferred to your spouse. As a result, that makes them tax-free, which can save you some money on your taxes.
The spouse who receives the stock options will then have a taxable gain or loss if they choose to sell them. The situation is treated as though they had the stock options all along. You will not have an impact on your taxes from what they do with the stock options. However, if your spouse is a non-resident alien, you will be taxed for splitting your employer stock options with them during your divorce.
What happens with your federal taxes when transferring employer stock options to your spouse?
If you have vested employer stock options transferred to your spouse before a divorce, nothing happens regarding your taxes due to the stock options being viewed as marital property. If the receiving spouse later chooses to exercise the vested non-qualified employer stock options and the fair market value is higher than the exercise price, the stock options would be viewed as money received from an employer.
In a high-net-worth divorce involving the transfer of incentive stock options to your spouse, the tax implications are the same. These cannot be transferred to another person besides you except in the event of your death. If this type of stock option is transferred, it is no longer considered an incentive stock option and becomes a non-qualified employer stock option.
In this situation, the tax rules favor you rather than your ex. You still enjoy the benefit of no tax consequences after transferring your employer stock options. However, your spouse will have to pay taxes on the stock options.
Whether you have stock options or your spouse does, they will likely need to be divided during divorce. It’s important to understand the tax consequences and take them into account during negotiations.