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Alert (July 11, 2012): Tax-Planning Developments And New IRS Guidance

The tax-planning landscape for people with stock compensation has become a little clearer, at least for the new Medicare tax increase starting in 2013. As for tax rates on income, capital gains, and dividends, insights from our contacts in Washington DC, confirmed by other sources, suggest that the current rates may be extended for another year to give Congress time to develop a meaningful reform of the US tax code during 2013 (regardless of who wins the presidential election in November). Meanwhile, the IRS has released guidance on three stock comp topics that are important to employees, their employers, and their advisors.
 
This alert summarizes these and other recent developments. See also the full list of recent additions and revisions at myStockOptions.com.
 
Supreme Court Decision On Affordable Health Care Act Affects Stock Compensation Planning

When the Supreme Court upheld the constitutionality of the Affordable Care Act, its decision also ensured the survival of the new law's health-care surtax on investment income, including stock. Starting in 2013, an extra 3.8% tax will be added to the usual capital gains tax for people with yearly adjusted gross income (AGI) of more than $200,000 (more than $250,000 for married joint filers). This surtax will apply to sales of company stock from equity compensation, and this may prompt some people to sell shares before the end of 2012. For the same taxpayers, the Medicare tax  will also rise from 1.45% to 2.35%. Stock compensation events triggering the 0.9% Medicare increase include the exercise of nonqualified stock options and the vesting of restricted stock or RSUs.

IRS Issues Long-Awaited Guidance On Section 83(b) Elections...

When you receive restricted stock, you can elect to be taxed on the value at grant instead of vesting. This is called a Section 83(b) election (not available for restricted stock units). Strict rules dictate when the filing has to be made and how it needs to be filed. Despite the fact that the filing must include specific information about the property (i.e. shares), such as its value and transfer date, the IRS has no form for the Section 83(b) election. However, the newly issued IRS Revenue Procedure 2012-29 presents a sample of acceptable language for making the election. It also provides examples showing the election's tax impact when the stock is later sold after vesting or if the grant is repurchased or forfeited before vesting. Read more in the related FAQ.

...Clarifies Substantial Risk Of Forfeiture...
 
Substantial risk of forfeiture (SRF) is a crucial concept in the Internal Revenue Code (Section 83), as it determines whether and when compensation is taxable; in stock compensation, the most common example occurs with restricted stock. In May, the IRS issued proposed regulations to clarify when a substantial risk of forfeiture exists for stock compensation. In general, the proposed regulations confirm and clarify previous IRS revenue rulings, private letter rulings, court decisions, and the generally accepted understanding of what constitutes a forfeiture risk. The proposed regulations do tweak the tax-code definition in areas that the IRS must have found concerning or potentially confusing. Read more about this topic, including the new IRS proposed regulations, in the related FAQ at myStockOptions.com.
 
...And Releases Dividend Rules On Corporate Tax Deduction For Stock Comp
 
Holders of restricted stock receive dividends when they are paid to shareholders. Although employees with restricted stock units (RSUs) do not automatically receive dividends, companies may choose to issue dividend equivalents to them. In Revenue Ruling 2012-19, the IRS has clarified the determination of when dividends and dividend equivalents paid to senior executives on restricted stock/RSUs are qualified performance-based compensation excluded from the $1 million tax-deduction limit for companies  under Section 162(m). The IRS explains that the dividends and dividend equivalents are grants of compensation separate from the related restricted stock and RSU grants, and therefore they must satisfy the requirements. They can be excluded from the $1 million calculation only if they vest and pay out upon the meeting of pre-established performance goals.

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