Last Updated 11 months ago
When you decide to leave your current employer, or they make that decision for you, the first question is what to do with your vested stock options. If you are a U.S. citizen in Israel, this means more than just the exercise cost; it includes understanding both U.S. and Israeli tax implications. Taking the time now to plan your next steps can save you significant time, money, and stress.
- Get a breakout of what is vested and what is unvested.
- Know your post-termination exercise window and expiration dates. This is usually 90 days.
- Clarify the current FMV or 409A value and see if your options are above or underwater.
- Check the amount of foreign tax credit carryovers you have from prior years on your U.S. tax return.
- Speak to your US tax advisor to ensure that exercising your vested options will not create double taxation between the US and Israel.
Understanding What’s Vested
Before leaving your company, you need a complete picture of your equity position. Only vested options can be exercised; unvested options typically expire immediately once you leave. Many employees assume that the shares belong to them once granted, but that is rarely the case.
It is also essential to know when each grant started vesting. Most companies have an online platform where you can view this information. You will need to export it to Excel or take screenshots to ensure you have it once your employment has been terminated.
If you are unsure how to access these details, your HR department or stock plan administrator can clarify it. You can also ask the trustee, which may be ESOP or IBI, to provide this information, but the detailed reports they share are often incomplete and lacking some essential data.
Knowing Your Exercise Window and Expiration Dates
Most people have as little as 90 days from their last day of employment to exercise their vested options. After that window closes, the options are gone for good. This rule exists because of most company policies, Israeli 102 plan requirements, and IRS regulations. If you miss this period, even valuable options become worthless.
In some cases, start-ups or private companies may extend the exercise period, but it usually comes with conditions such as converting 102 track options with beneficial Israeli tax rates into a non-beneficial track. This change can increase taxes from 30% to 62%, so you may prefer to keep the lower tax rate and the 90-day window. You do not want to discover this on your last day of work.
Timing also matters from a cash flow perspective. Exercising requires payment of the strike price and may trigger immediate tax. Planning the timing around available funds and tax implications can help you defer U.S. tax by over a year. The difference between exercising stock options in December of one year and January of the next can defer the taxable event into the following year.
For more on 102 plans, here is our article on 102 plans and the biggest mistakes people make with them.
Clarifying the Current FMV or 409A Value
The Fair Market Value (FMV), also referred to as the 409A valuation for private companies, determines the current worth of your shares. Knowing this number helps you assess whether your options are above or underwater. You are in a gain position if the FMV exceeds your strike price. If it is lower, your options may not be worth exercising yet.
You may also have a sense of where the company is heading. Do you envision an IPO or acquisition in the near future? You might decide to buy and hold your stock options in anticipation of a future payout. Alternatively, exercising may not be worth the cost if you suspect the company is struggling. For private companies, the 409A value is usually updated annually, and that number drives the tax treatment of your exercise. Exercising when the FMV is too high can create taxable income without a corresponding cash benefit if the shares cannot yet be sold.
Understanding this value gives you clarity, though it can sometimes be challenging to obtain. Many Israeli start-ups hesitate to share their 409A value with employees due to concerns about leaks or misinterpretation by investors. Still, this information is essential for U.S. tax purposes. Try to obtain it through your HR or finance department whenever possible.
Checking Your Foreign Tax Credit Carryovers
When you exercise stock options, the U.S. and Israel often recognize income at different times. For U.S. tax purposes, exercising stock is typically a taxable event, while under Israeli 102 plans, taxation usually happens when the stock is sold. This timing mismatch can create temporary double taxation unless you plan ahead. Understanding how foreign tax credits can bridge this gap is crucial before you make any moves.
If you have worked for a few years and have a good CPA, you may have accumulated foreign tax credit carryovers from prior years. These credits can play a significant role in determining whether exercising your stock options creates additional U.S. tax or not. The foreign tax credit system is designed to prevent double taxation but only works if managed carefully.
For many, the amount of Israeli taxes paid on salary annually is well above what would be owed in the United States. The difference between Israeli and U.S. taxes can be carried forward to future years. This carryover balance can offset U.S. tax due on option income, provided it is in the same income category and within the usable timeframe. If you let credits expire unused, you are essentially paying tax twice. Reviewing your carryover situation before exercising helps you understand how much cushion you have.
Your U.S. tax advisor can pull this information from your most recent tax return. The goal is to match the timing of income and available credits to minimize total tax. A well-planned exercise can turn what looks like a big tax bill into a manageable or even neutral event.
For the complete guide: The essential guide to stock equity grants in Israeli high-tech.
Speaking with Your U.S. Tax Advisor
The final step ties everything together. Stock options are one of the most complex areas of tax law, especially for those living in Israel with U.S. citizenship. The timing of your exercise, sale, and reporting must be coordinated between both tax systems. Israel taxes most stock options differently from the U.S., and those moments often do not align. Without planning, you can pay tax in both countries on the same income, leaving you holding a tax bill instead of cash.
A qualified tax advisor who understands both sides or works closely with an Israeli professional can help design the best strategy. They can model different timing scenarios, ensure proper reporting, and verify whether you have sufficient credit to offset any potential double taxation. This discussion should occur before exercising, not after, since the tax event is already triggered once the shares are exercised.
Leaving your job marks a time of transition, and your stock options deserve just as much attention as your next career move. Reviewing these steps and consulting with an expert ensures that the equity you worked so hard to earn becomes a financial reward instead of a tax headache.
If you or someone you know is leaving their company and needs to make sure they handle everything properly, get in touch with our office.
To make sure you aren’t falling into any traps, check out the top 5 mistakes people make with their stock options.