Alert (Oct. 18, 2012): Tax & Year-End Planning
For Stock Compensation In 2012
This alert summarizes some of our recent additions and updates on tax and year-end planning for stock compensation, along with developments in other content at myStockOptions.com. See also our section on year-end planning and the full list of recent additions and revisions.
Social Security Yearly Income Cap Rise In 2013 Affects Stock Comp
The Social Security Administration (SSA) announced on October 16 that the Monthly Social Security and Supplemental Security Income (SSI) benefits will rise 1.7% in 2013. In addition, based on an increase in average wages, the maximum amount of earnings subject to the Social Security tax will rise to $113,700 in 2013, up from $110,100 in 2012.
Collectively known as FICA taxes (also employment taxes or payroll taxes), Social Security and Medicare taxes are withheld by your company, which pays them to the IRS. When nonqualified stock options and stock appreciation rights are exercised, and when restricted stock and restricted stock units vest, FICA taxes are owed alongside ordinary income taxes. Similarly, when you defer compensation, whether through a 401(k) plan or nonqualified deferred compensation plan, you owe FICA taxes at the time of deferral (even though income tax is delayed until the deferred money is later paid out).
Social Security tax is normally withheld at 6.2%, but a rate cut for 2011 and 2012 has temporarily brought Social Security withholding down to 4.2%. The combination of the current Social Security wage base ($110,100 for 2012) and the 4.2% rate results in maximum Social Security withholding of $4,624.20 during 2012. The New York Times has reported that the Social Security rate is likely to return to 6.2% after 2012, as there is little political support for extending the payroll-tax cut. In 2013, with the higher income ceiling and the return to the 6.2% rate, the maximum yearly Social Security withholding will jump to $7,049.40 (a 52.4% increase).
See a recently updated FAQ on year-end planning for strategies relating to Social Security and Medicare taxes.
Tax-Rate Uncertainty Makes Year-End Planning Guidance More Important Than Ever
Wondering about future tax rates? You're not alone. Two years ago, Congress extended the Bush tax cuts through 2012, but these are finally set to end at the close of this year. If the tax cuts expire without additional legislation, tax rates will automatically increase in 2013 to the pre-Bush levels. However, nobody yet knows exactly what will happen, and uncertainty seems likely to reign until Congress finally turns back to tax legislation after the presidential election in November. At the moment, only the Medicare tax increase has been enacted, but even that could change, depending on the outcome of the election.
This tax uncertainty complicates your financial planning at the end of 2012, requiring you to explore a few different potential tax scenarios. The articles and FAQs in our section on year-end planning present many ideas to consider. The articles include:
- Top Ideas For Year-End Tax Planning With Stock Compensation
- Year-End Strategies For Restricted Stock: Ideas To Consider
- Year-End Strategies For Employee Stock Purchase Plans: Ideas To Consider
Withholding Taxes On Equity Comp Will Change In 2013
Many tax-rate increases have the potential to occur in 2013. These would include a rise in the flat withholding rate on supplemental wage income, such as stock compensation, to 28% for amounts under $1 million in a calendar year (39.6% for amounts over $1 million in a calendar year). In addition, people with high incomes face an increase in the Medicare tax rate, to 2.35%, and for all taxpayers the Social Security rate on wages up to the yearly limit is scheduled to return to 6.2% from the temporarily reduced rate of 4.2%. A new FAQ on myStockOptions.com presents a table outlining the income levels that trigger changes in tax withholding.
New Articles Help Executives Avoid SEC And IRS Problems
A new two-part series, Compliance Concerns That Executives Must Understand To Prevent SEC, IRS, And Corporate Problems, explains the top 10 most important points executives must know to stay out of trouble with their equity awards. This article nicely complements the other articles and FAQs in the SEC Law section at myStockOptions.com. Part 1 focuses on compliance issues involving company stock holdings and transactions, including insider trading, Section 16, share-ownership requirements, and Rule 144. Part 2 presents several more issues, including those involving foreign financial interests, nonresident state tax returns, retirement plan funding, and company hedging rules.
At myStockOptions.com, our publication schedule runs all year. Check back often for new articles, and remember that any or all of our content is available for licensing by companies as part of their stock plan education for employees and executives.