Year-end strategies for restricted stock, options, and ESPPs
Donating company stock: maximizing the tax deduction
Articles on year-end planning
Tax season preview: revised 1099-B, new Form 8949, and revamped Schedule D
Surveys show performance share awards more popular than stock options


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Our articles and FAQs on year-end financial and tax planning always attract many visitors. In this newsletter, we provide some of the insights you will find throughout

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Featured FAQs On Year-End Planning

Below are two frequently asked questions (FAQs) about year-end financial and tax planning. They are taken from the 750+ FAQs on All of these FAQs are available for your company to license or by Premium or Pro Membership. Please do not copy or excerpt this information without our permission.

What are some year-end strategies for my stock options, restricted stock, and ESPPs?

The 2010 Tax Relief Act, the result of a much-debated compromise between President Obama and Congress, extended the 2010 tax rates through 2012. Given the current political stalemate in Congress and the presidential election ahead in 2012, it is unlikely that the tax rates for your 2012 income will change. This should simplify your financial planning at the end of 2011.

Unless you were already definitely planning to sell company stock or exercise options soon, most experts feel that unease about higher tax rates, perhaps in 2013, should not be the only reason for doing so at the end of the year. Below we present several situations and some strategies that many experts suggest.

1. You are planning to sell the stock at exercise late this year or early next year. You should calculate whether the ordinary income at exercise will push you into a higher tax bracket, and what the taxes will be if the rate for that bracket goes up. To break up the tax hit, you may want to spread the same-day exercise/sale over the end of this year and the beginning of next year.

2. You're over or near the yearly maximum for Social Security. If your income at year-end already exceeds the Social Security wage base for the year ($106,800 in 2011), by exercising nonqualified stock options or stock appreciation rights in December you can avoid Social Security tax. If you wait until January, your yearly wage base (rising to $110,100 in 2012) starts at $0, and Social Security tax will again apply on the exercise spread and the vesting value of restricted stock up to the new maximum for that year.

One of the most meaningful provisions 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 from $6,621.60 to $4,485.60, a savings of $2,136 ($4,272 for married couples). If your annual income is under the Social Security wage-base maximum ($106,800 in 2011), then exercising NQSOs before the end of 2011 will let you benefit from this 2% reduction, as the Social Security rate will return to 6.2% in 2012 unless Congress extends it. However, if the 2% cut is extended into 2012, then there will be no need to accelerate NQSO exercises into 2011. (For the status of this tax-rate issue, see a recent memo from Deloitte.)

Alert: Starting in 2013 a new 3.8% Medicare tax will apply to investment income, such as dividends and stock sale gains, for people in the top tax brackets. If you have incentive stock options, you may want to consider an exercise and hold in 2011 for the ISOs you planned to exercise in 2012. This would help you avoid the new Medicare tax if you intend to sell the ISO shares for favorable tax treatment after holding them for one year.

3. Your restricted stock vested this year. Unlike stock options, which trigger taxes when you choose to exercise them, restricted stock usually gives you no control over the timing of your taxes because you are taxed when the shares vest. (There are two exceptions to this: opting to be taxed at grant instead by making a Section 83(b) election, unavailable for restricted stock units, or having restricted stock units with deferral features.) At vesting, you own the stock outright and have taxable W-2 income. Therefore, you can try to plan the timing and shifting of other income around this restricted stock income, as suggested in #1 above, or consider selling as covered in #4 below.

4. You plan to sell company stock. You hold company stock from an option exercise, restricted stock vesting, or ESPP purchase.

Alert: When you're selling company stock at a loss to net against gains, be careful about the wash sale rule if you intend to buy company stock again soon. Wait at least 30 days before repurchasing. However, be aware that the rule applies only after sales of stock at a loss. You can sell appreciated stock for a gain and soon repurchase it without wash sale problems.

Alternatively, your stock price substantially increased, hitting your targets earlier than you expected. Now you want to sell because you are concerned that your stock has peaked, or because you are worried about overconcentration in company stock, but you dislike paying short-term capital gains rates (i.e. the same rates as those for ordinary income). Check whether you have capital-loss carry-forwards from last year or short-term losses from this year that you can net against these gains. This is a good time to use up these losses against your short-term gains, which can also be created from sales of ESPP shares. (See the related FAQ on netting capital losses against capital gains.)

Read the full FAQ for more details of these ideas plus six other strategies, including ways to reduce the alternative minimum tax.

What is important to know when I donate company stock?

For shares you may have recently received from an option exercise, ESPP purchase, or restricted stock vesting, the tax treatment is the same as it is for donations of any stock to a qualified charity. When you have held the stock for more than one year, at the time of the donation you get a tax deduction for the fair market value of the stock (not for your cost basis). If the sale of the appreciated shares would have triggered long-term capital gains, your deduction is up to 30% of your adjusted gross income (20% for family foundations), and you can carry forward amounts over this for five years.

When you donate stock, to implement the transfer you need the charity's brokerage account information, with the DTC (Depository Trust Company) number and an account number. Your instructions to your brokerage firm should include this information and any specific lot identification.

Alert: For year-end donations, be sure the stock transfer is completed by December 31 to make it count for the current tax year. For electronic transfers from your brokerage account, the donation is recorded on the day it is received by the charity/foundation (not when you approve the transfer). With increased year-end activity at brokerage firms, you should plan your year-end stock gifts as early as possible and have ongoing communications with your broker to ensure that the transfer takes place.

For more details on donations of stock, including examples and special valuation rules on private company stock, see the full FAQ in the section Financial Planning: Gifts. For the tax rules and some ideas related to gifts of stock, see another FAQ.

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Special Articles On Year-End Planning

Ten Ideas For Year-End Tax Planning With Stock Compensation
Consider year-end or year-beginning tax planning with your stock options and company stock. While investment objectives, not tax considerations, should generally drive your decisions, here are 10 ideas to review to prevent paying more taxes than necessary. This article is available free to all registered users.

Stockbrokers' Secrets (Part 3): Year-End Planning For NQSOs, Restricted Stock, And RSUs, by W.E.B. Bantling and Michael Beriss
The time for tax planning is before the year ends; tax season is too late. Learn about several ideas for year-end 2011 that apply to nonqualified stock options (NQSOs) and restricted stock/RSUs. Meanwhile, look ahead at the likelihood of tax rate changes after 2012.

Year-End Strategies For Employee Stock Purchase Plans: Ideas To Consider, by Matt Simon
When you think about year-end financial and tax planning, don't forget to review shares acquired through an employee stock purchase plan. This article outlines issues and strategies to contemplate.

Year-End Strategies For Restricted Stock: Ideas To Consider, by Bruce Brumberg
As part of your year-end and year-beginning tax planning, don't forget to review any grants of restricted stock, RSUs, or performance shares that vested this year, plus other company stock holdings. This article presents strategies many experts suggest.

Stockbrokers' Secrets (Part 7): Year-End Planning For ISOs, by W.E.B. Bantling and Michael Beriss
Learn about year-end planning specifically for incentive stock options, including ideas related to the alternative minimum tax.

The ISO Tax Trap And The AMT Credit Myth: What To Do Before Exercise And At Year-End, by Alan Ungar
The tax reductions of the past few years have brought both good and bad news for holders of incentive stock options (ISOs). While you may have lower capital gains rates when you hold the shares long enough after exercise, it's harder to avoid the risks of the alternative minimum tax (AMT) and to fully recoup any AMT credit.

Nonqualified Deferred Compensation:, A Complete Online Resource For Participants And Professionals

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Tax-Season Preview: Prepare For Expanded 1099-B, New Form 8949, & Revised Schedule D

The revised Form 1099-B will include much more information on your stock sales to help with tax return reporting (and IRS tracking), though W-2 income from stock compensation and stock acquired before 2011 will lead to confusion on determining your tax basis. In addition, Schedule D has been completely revamped, and most of the details about stock sales will now go on the new IRS Form 8949. On, an FAQ and an article about these tax forms explain what these changes mean for you and your tax return, and how to avoid overpaying your taxes.

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Surveys Show Performance Share Awards More Popular Than Stock Options

Frederic W. Cook & Co. published its an annual survey of compensation practices for executives at the largest 250 companies in the S&P 500 (see The 2011 Top 250). The firm's observations include the following:

  • For the first time in the report's history, the use of long-term performance shares (72% of companies) is more prevalent than the use of stock options (70% of companies). The firm does not foresee the end of stock options, however, as they are a performance-based long-term incentive that complements full-value share awards.
  • The use of time-vesting restricted stock awards appears to have "stabilized" (59%).

James F. Reda & Associates also found that performance-based awards (77% of the surveyed companies) now slightly exceed stock options/SARs (75%, down from 82% in 2008). The results are published in Study Of 2010 Short- And Long-Term Incentive Design Criteria Among Top 200 S&P 500 Companies, Oct. 2011. The survey found that the use of time-based restricted stock rose from 48% in 2008 to 56% in 2010.

For summaries of over 12 surveys on equity compensation, see our full FAQ about stock comp trends.

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