CFP® Practice Question of the Week: Tax Liability

This question appeared on a previous CFP Board examination. The Board indicates that the question was intended to address the applicant’s understanding of “Job Task Domain 6 – Implementing the Recommendation(s).” The Board indicates that you can expect to see 9% of Board exam questions on this Domain.

Turning to the question, non-qualified stock options are taxed on the “bargain element” (difference between the market price and the strike price) as ordinary income when exercised.

(Market Price – Strike Price) x Number of Shares x Tax Rate = Tax

On the first NQ grant of 2,000 shares, the tax is:

($65 – $34) x 2,000 shares = $62,000 in ordinary income

At a 42% tax rate, the tax is $62,000 x .42 = $26,040

On the second NQ grant of 5,000 shares, the tax is:

($65 – $30) x 5,000 = $175,000 in ordinary income

At a 42% tax rate, the tax is $175,000 x .42 = $73,500

Total tax, therefore, is $26,040.00 + $73,500.00 = $99,540

The correct answer is D.