Consider Your Options: Get the Most from Your Equity Compensation

by Kaye A. Thomas

Overview

A NEWER EDITION OF THIS BOOK IS NOW AVAILABLE. Search: 1938797094.Are you receiving stock or options from your company? This plain language book makes it easy to understand the rules, and reveals strategies for maximizing value and minimizing taxes. It covers stock grants, nonqualified options, incentive stock options and employee stock purchase plans. This is the eighth edition of this popular title, updated for all the latest tax changes.

Product Details

ISBN-13:	9781938797026
Publisher:	Fairmark Press Incorporated
Publication date:	11/04/2013
Pages:	306
Product dimensions:	5.90(w) x 9.00(h) x 0.70(d)

About the Author

Kaye A. Thomas writes books on tax strategies for investors and maintains the highly regarded Fairmark.com website, your source for plain language news, guidance and features on taxes and investing. He is a 1980 graduate of Harvard Law School.

Read an Excerpt

Chapter 10: Planning for Stock Grants and Purchases

Most tax planning for stock grants and purchases revolves around the section 83b election. Even if your company offers stock that will be vested when you receive it, you may wish to consider whether you can change the deal and use the section 83b election to reduce your taxes.

Some of these planning ideas require cooperation from the company. You should bear in mind that good tax planning for you may be bad tax planning for the company. Anything you do to reduce or postpone the amount of compensation income you have to report will cause a corresponding decrease or delay in the amount of compensation deduction the company will enjoy.

Accelerating Income

Suppose you have the following deal with your employer. You'll receive 100 shares of stock without restrictions if your employment continues for another year. This is a simple case of a stock grant without restriction as described in Chapter 9. In some circumstances you can improve on the tax consequences without really changing the deal.

Consider an alternative where you receive the stock now instead of having to wait a year-but you'll forfeit the stock if your employment terminates before a year is up. Basically that's the same as the other deal: you get to keep the stock only if you work for that cornpany for a year. You may get a better tax treatment, however, if you make the section 83b election. That would permit you to report compensation income at the time you receive the stock, rather than at the end of the year when the stock vests.

You would do this only if two things are true. First, you expect the value of the stock to go up duringthat year. There's no point reporting income earlier than necessary just for the sake of paying taxes sooner. If the stock is going up, though, you can use this maneuver to reduce the amount of compensation income you have to report. It may make sense to negotiate this change if you expect a big increase in the stock's value in the near future.

In addition, unless the value of the stock is very small when you receive it, you would want to be pretty confident that your employment will last through the year before heading in this direction. You wouldn't feel smart if you made this change, and paid taxes after filing the section 83b election, only to find that you end up forfeiting the stock.

Example: Your employer offers to reward you with 2,000 shares of stock if you continue to work there another year. You feel that the value of the stock is likely to go up in that time, so you suggest an alternative: you'll receive the stock now, but forfeit it if you don't continue to work there another year. The company agrees. You receive the stock, make the section 83b election and pay tax on the current value.

Then the unexpected happens. You get an offer you can't refuse from another company. You quit your current job and forfeit the stock. Economically, you're in the same position as if you hadn't made the change, because you wouldn't have received the stock under the original deal. From a tax standpoint though, you're worse off, because you reported income when you made the section 83b election and you won't get any offsetting deduction when you forfeit the stock.

Deferring Income

You can also use the rules for vesting to postpone income. Suppose your company is going to make a stock grant to you, without any restrictions. Normally that would mean you'll report compensation income, but you want to avoid reporting income this year. In this situation you might want to consider asking for a restriction on the stock, so that you'll forfeit it if your employment ends within the next year.

Naturally, you would do this only if you're confident that your employment will in fact continue for that period of time. You could be forfeiting a valuable right if you accept such a restriction and you leave your job. In addition, it wouldn't make sense to do this if you anticipate a great increase in the value of the stock while you're waiting for it to vest. These two possibilitiesforfeiting the stock or seeing a hefty increase in its value before vesting-make delayed vesting a risky planning device. In limited circumstances, though, it makes sense to at least consider this approach.

You may be tempted to use a very short time periodfor the stock to vest. For example, if you're going toreceive a stock grant in November, you may want to delayvesting until the beginning of January. That's a riskyproposition, though. You can delay reporting compensa-tion only if there is a substantial risk of forfeiture. The IRSmight decide this wasn't substantial. There's no specifictime period that's safe, but I get nervous with vesting thatoccurs less than six months after receipt of the stock.Similarly, anything else you do to reduce or eliminate therisk that you'll forfeit the stock may cast doubt onwhether the tax deferral will pass muster.

Benefits and Risks of Section 83b Election

The section 83b election can provide multiple benefits. Most obviously, it reduces the amount of compensation income you have to report if the value of your stock goes up during the vesting period. It also starts the clock running sooner for long-term capital gains...

Table of Contents

1: The Buzz-and the Buzz Saw

2: The Big Picture

3: Stock 101

4: Income Tax 101

5: Capital Gains 101

6: Gift and Estate Tax 101

7: Investing 101

Part II: Stock Grants and Purchases

8: Terminology for Stock Grants and Purchases

9: Rules for Stock Grants and Purchases

10: Planning for Stock Grants and Purchases

Part III: Options in General

11: Options 101

12: Receiving Stock Options

13: Nonqualified Options and ISOs

14: How to Exercise a Stock Option

Part IV: Nonqualified Stock Options

15: Exercising Nonqualified Stock Options

16: Selling NQO Stock

17: Gifts of Nonqualified Options

18: Planning for Nonqualified Options

Part V: Incentive Stock Options

19: Overview of Incentive Stock Options

20: Exercising Incentive Stock Options

21: Early Disposition of ISO Stock

22: Sale of Mature ISO Stock

23: Planning for Incentive Stock Options

Part VI: Special Features for Options

24: Using Stock to Exercise Options

25: Using Stock to Exercise Nonqualified Options

26: Using Stock to Exercise ISOs

27: Early Disposition After Stock Exercise

28: Deferring Income from Nonqualified Options

29: Reload Options

30: 'Early Exercise' Stock Option Plans

Part VII: Alternative Minimum Tax (AMT)

31: Overview of AMT

32: AMT and Long-Term Capital Gain

33: AMT and Dual Basis Assets

34: AMT Credit

Part VIII: Vesting

35: General Rules for Vesting

36: Vesting and Securities Rules

37: Section 83b Election

Part IX: Employee Stock Purchase Plans

38: Overview of Employee Stock Purchase Plans

39: ESPP Tax Consequences

Part X: Other Topics

40: Fair Market Value

41: Compensation Income

42: Estimated Tax Payments

43: Identifying Shares

44: The Wash Sale Rule

45: Protecting Gains Without Selling

46: Reporting Sales of Stock

Resources

Index

What People are Saying About This

Laura Fay

Laura Fay, Vice President, E*TRADE Business Solutions Group

An excellent, thorough, and easy-to-read resource for anyone who has received stock compensation.

Corey Rosen

Corey Rosen, Executive Director, National Center for Employee Ownership

A very good overview of the tax and financial planning implications of stock options, written in a way that's useful to experts and understandable to those who are not.