Tax planning and compliance for investors
Free Online Guides
November 7, 2013
By Kaye A. Thomas
Every highly publicized IPO — this time it’s Twitter — provokes renewed attacks on rules permitting corporations to claim a deduction corresponding to the amount of option income reported by executives and other employees. These wrongheaded attacks are based on the notion that current law works to the detriment of the Treasury in allowing an overly generous tax treatment. The truth is exactly the opposite: the government benefits hugely from the current tax treatment of stock options.
April 2, 2013
By Kaye A. Thomas
In two important ways, this is the last year for the AMT refundable credit, which is mainly used by people who paid AMT in a previous year in which they exercised incentive stock options.
May 30, 2012
Section 83 of the Internal Revenue Code is important to anyone who deals with stock options or other forms of equity compensation: it tells us when the recipient must report income and how to measure its value. The IRS has proposed changes to the regulations that would take effect January 1, 2013. In essence, though, the proposal merely reflects positions the IRS previously staked out in Rev. Rul. 2005-48, so the regulation would confirm the existing view of the IRS rather than make a genuine change in the law.
Minor update: Our book Consider Your Options discusses the effect of various restrictions, and states that a lockup period does not prevent shares from being treated as vested “although there is no direct authority on the issue.” The proposed regulations address this point. The conclusion in our book is accurate, but it is no longer correct to say there is no direct authority.
April 26, 2012
By Kaye A. Thomas
Planning for incentive stock options always involves a level of uncertainty. A typical strategy involves holding at least some of the shares for a year or more after exercising the option, while sweating out the possibility that a decline in the stock price will wipe out the tax benefit and then some. This year option holders face an unusual level of uncertainty in the tax law as well. We’re dealing with at least five significant variables.
September 6, 2011
Leverage is a key concept in investing, and one that has special application to stock options. If you’ve received options as part of your compensation, you’ll want to understand how leverage affects your profit. (more…)
July 20, 2011
Senators Levin (D. Mich) and Brown (D. Ohio) have introduced the Ending Excessive Corporate Deductions for Stock Options Act, legislation that would limit the amount a corporation can deduct in connection with the exercise of compensatory stock options to the amount shown as an expense for the options in its financial statements. Similar proposals have been made in the past without garnering wide support.
Comment: Although it seems superficially logical that the tax deduction should not exceed the accounting expense, these figures differ because their purposes differ. The accounting expense relates to the company’s cost of providing this benefit, which in turn is based on the value of the option when granted. The tax deduction relates to the value of the benefit received by (and taxed to) the option holder, which is based on the bargain element of the option when exercised. A mismatch between these numbers is a normal consequence of ups and downs in stock prices and does not indicate the company has understated its accounting expense or claimed an excessive deduction.
October 13, 2010
Someone asked on our message board about whether it makes sense to participate in a deferred compensation plan, and we decided to post a response here so it might be seen by more visitors. There’s more to these plans than meets the eye: the true nature of the tax benefit is far from obvious — and the same is true of the plan’s risk. (more…)
June 8, 2010
In a previous post we explain why, for years prior to 2010, it was potentially advantageous for individuals holding incentive stock options with large built-in profits to adopt a strategy under which they sell 65% of the shares immediately after exercising the option and hold 35% of the shares long enough to avoid a disqualifying disposition. In this post we explain how the “35% solution” changes for options exercised in 2010, and changes again for options exercised in 2011. (more…)
|That Thing Rich People Do||The fastest, easiest way to learn the principles of investing.|
|Our complete guide to Roth IRAs and Roth accounts in employer plans: choosing, creating, building and using these accounts.|
|Consider Your Options|
|A plain-language guide for people who receive stock options or other forms of equity compensation.|
|Equity Compensation Strategies|
|A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.|
|Capital Gains, Minimal Taxes|
|Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.|