Foundational Tax Concepts

Understanding how taxes work is key to making smart decisions about equity compensation—here are the core points from the lesson:

• Gross income is reduced by payroll taxes and deductions to determine adjusted gross income (AGI) and taxable income, which drives your federal tax liability
• Long-term capital gains (assets held over a year) receive lower federal tax rates than ordinary income, often saving high earners significant amounts
• State tax treatment varies—most states don’t offer preferential rates for long-term gains, and some, like Massachusetts, penalize short-term gains more heavily
• Investment losses can offset gains and up to $3,000 of ordinary income per year, but “wash sale” rules can disallow losses if you repurchase too soon
• The Alternative Minimum Tax (AMT) may kick in if you're using lots of deductions or exercising incentive stock options, so it’s important to model this in advance

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