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Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.


What impact does the 2010 Tax Relief Act have on stock compensation and financial planning?

The 2010 Tax Relief Act was enacted in December 2010. It extended the 2010 tax rates through 2012. While the expiration of this tax-rate extension would automatically increase tax rates in 2013, the current political stalemate in Congress makes the post-2012 future of tax rates uncertain, further complicating year-end planning for stock compensation.

Below are eight related planning points for equity compensation.

1. The most meaningful provision in the 2010 Tax Relief Act was the 2% cut in the Social Security tax rate, from 6.2% to 4.2% (Medicare remains uncapped at 1.45%). This reduced the Social Security tax maximum in 2011 from $6,621.60 to $4,485.60, a savings of $2,136 ($4,272 for married couples). In 2012, the Social Security wage base is $110,100 ($113,700 in 2013). Congress extended the 4.2% rate through all of 2012, so the maximum possible Social Security withholding for the year is $4,624.20.

2. The tax advantages of one type of stock grant over another will not change (e.g. incentive stock options compared to nonqualified stock options), as the tax rates for ordinary income and capital gains were extended (see our sections ISOs: Taxes and NQSOs: Taxes for details on the different tax rules for these grants). While a wider difference between the capital gains rates and ordinary income rates would make ISOs more attractive, this is not happening, at least not in the next few years.

3. The withholding rates for supplemental wage income have not changed. This applies to the income at the exercise of NQSOs and stock appreciation rights; the vesting or share delivery of restricted stock, RSUs, and performance shares; and purchases in an employee stock purchase plan that is not tax-qualified. The rate remains 25%, and 35% for amounts of supplemental income above the $1 million threshold during a tax year. If tax rates had increased, these percentages would have risen too, as they are tied to the current rates in those tax brackets.

4. The annual legislative patch to extend the AMT income exemption amounts (see details below) is crucial both for anyone who exercises and holds ISOs and for many higher-income taxpayers: it prevents the exemption amounts from dropping to low levels of 2000, which would expose many more people to the AMT. Anyone who exercises ISOs will still want to look at various strategies for minimizing AMT (see a related FAQ).

5. The extension of the tax rates meant you did not have to decide whether to accelerate income into 2010 or 2011 (e.g. by exercising stock options, selling appreciated company stock, pro rata vesting of performance shares or cash bonuses) and delay deductions into 2012. This made the last two weeks of 2010 and 2011 much less active for financial and tax decisions than they could have been. However, the situation at year-end 2012 is similar to that in 2010, and many of the same issues have arisen in financial planning (see a related article).

If the uncertainty over rising tax rates in the long term concerns you (either the possible expiration of the tax-cut extension in 2013 or perhaps a serious effort at tax reform), then you will want to review our article series on the effect of tax rate increases on your strategies for NQSOs, restricted stock, and ISOs.

Concerns about the possibility of rising tax rates in the US at some point in the future are not unjustified. Many countries in the developed world have recently increased tax rates to address budget deficits. As our Global Tax Guide reports, rates have risen in many countries, and some governments have modified or ended special tax treatments for various types of equity awards. See, for example, changes in the United Kingdom, Canada, France, and Ireland.

6. With new rates and exemption amounts for estate tax and gift tax, shifts will occur in the various estate-planning and gifting strategies concerned solely with tax avoidance for high-net-worth individuals, unless you have a very large estate. (See the articles and FAQs in the sections Estate Planning and Gifts in the Financial Planning section of However, the uncertainty over these rates beyond 2012 could make it misguided to rely on them.

7. If you want to convert a regular IRA to a Roth IRA, now possible without any concern over income phaseouts, remember that 2010 was the only year when you could split the taxes owed from the conversion between two years (2011 and 2012). The extension of the 2010 tax rates through 2012 made splitting the taxes a real benefit for those who made a conversion in 2010. For more on Roth IRA conversions and the role stock compensation can play, see our article series on the topic.

8. The tax exclusion for capital gains from the sale of qualified small business (QSB) stock was temporarily increased by the Small Business Jobs & Credit Act of 2010 until the end of 2010. Later, the 2010 Tax Relief Act extended this provision through 2011. For QSB stock issued between September 27, 2010, and the end of 2011, the exclusion was 100%. The exclusion therefore resulted in a 0% tax rate on gains from the sale of QSB stock issued between those dates, as long as certain conditions were met (e.g. the stock had to be held for five years). Also, for the duration of this measure, tax-excluded capital gains from QSB stock were also temporarily omitted from the alternative minimum tax (AMT) calculation. The exclusion helped anyone buying stock in a small private company, including stock from an option exercise or restricted stock vesting.

In the section Financial Planning: High Net Worth, has an article series on tax strategies involving QSB stock and specialized small business investment companies.

AMT Income Exemption Amounts For 2010 And 2011

The exemption amounts for alternative minimum taxable income (AMTI) are especially important for anybody who exercises incentive stock options (see the FAQ on the AMT calculation) and other high-income taxpayers in certain states. Passed in the Tax Relief Act, the AMT income exemption amounts for the tax year 2010 were $72,450 for married joint filers and $47,450 for single filers. For 2011, the two amounts were $74,450 and $48,450.

This AMTI exemption amount is phased out for high-income individuals by 25 cents for every dollar of AMTI over specified thresholds. For joint filers, this phaseout range starts at $150,000 of AMT income; for single filers, the phaseout starts at $112,500. For the tax year 2010, the exemption was fully phased out (i.e. zero) when AMTI was equal to or exceeded $439,800 for joint filers and $302,300 for single filers. Under the 2011 income exemption amounts, the phaseout was eliminated at $447,801 for joint filers and $302,301 for single filers.

See related FAQs on strategies to minimize the AMT and on planning when you cannot avoid the AMT.

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