From the Editor: talking about tax uncertainty
Potential tax increases in 2013 that affect stock comp
Medicare tax changes affect planning for stock comp
How the withholding taxes on equity compensation may change in 2013
New research shows latest equity award trends
Special articles to help executives avoid SEC and IRS problems
Does NQ deferred comp still make sense with higher taxes ahead?
Catch us at the NASPP and FPA annual conferences


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Future tax rates on your mind? You're not the only one. Although just three months remain before the current tax law ends at the close of 2012, the tax landscape beyond is still foggy. Given the stalemate in Congress and the upcoming presidential election in November, it remains unclear whether tax rates will definitely increase in 2013, when the Bush tax cuts are set to expire. Only the Medicare tax increase is definitely scheduled, but even that could change depending on the outcome of the election. As we set forth in a recent article about these tax uncertainties, the current situation will complicate year-end financial planning in 2012. (See our articles and FAQs on year-end planning for detailed insights.)

In the newsletter below, we present three FAQs that neatly encapsulate all of the issues to consider with stock compensation amid the current tax-rate uncertainty. In addition, the newsletter also presents a smattering of other new content at, which we constantly update and expand.

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—Bruce Brumberg (Editor-in-Chief)

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Three FAQs On Future Tax Rates

What are the potential tax increases in 2013 that may affect stock compensation?

Unless the current tax rates are extended beyond 2012, the following potential tax increases may apply to any option exercise, restricted stock/RSU vesting, or ESPP purchase that triggers ordinary income and/or Social Security and Medicare tax. (See related FAQs that show the taxes and withholding rates for various types of equity awards.)

  • The flat federal rates for supplemental income withholding may rise to 28% and 39.6%. These rates, currently 25% (amounts under $1 million) and 35% (amounts over $1 million), are tied to specific tax brackets.
  • The Social Security rate may return to 6.2% from the current reduced rate of 4.2%. (Social Security tax applies only up to the yearly wage cap, which is $110,100 in 2012.)
  • Under the Affordable Care Act, for high-income taxpayers the Medicare tax rate on compensation income will rise to 2.35% from 1.45%, and a new 3.8% Medicare surtax will apply to capital gains upon stock sales.
  • The capital gains rate that applies to the proceeds of a stock sale may return to 20% from the current rate of 15%.
  • The dividend tax rate may rise from 15% to 20%, or even go up to 39.6%. This would apply to any dividends you receive on company stock, including unvested restricted stock.

Unless you were already definitely planning to sell company stock or exercise options soon, many experts would say that the likelihood of higher tax rates ahead should not be the sole reason for taking these actions before the end of 2012. Each person's situation is different. You should make projections involving potential stock-price increases, tax-rate increases, the timeframe for action, and the return on an alternative investment or other use of the proceeds. The tools on can help you with this analysis.

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How does the health-care reform law affect planning for stock compensation and my Medicare tax rate?

When the Supreme Court upheld the constitutionality of the Affordable Care Act in June 2012, its decision also ensured the survival of two features in the new law that affect your Medicare tax, starting in 2013. The post-2012 tax-planning landscape for people with stock compensation has therefore become a little clearer.

Surtax On Investment Income

Starting in 2013, an extra 3.8% tax will be added to the usual capital gains tax for people with yearly adjusted gross income 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. No exceptions apply for nonresident aliens or for US citizens working outside the United States.

For example, if you exercised incentive stock options and have held the shares long enough (two years from grant, one year from exercise) for a sale to be a qualifying disposition, you may decide to sell the shares in 2012. This would let you pay just the current 15% top capital gains rate on the gain over the exercise cost and would also avoid the additional Medicare tax. Of course, your overall financial planning should consider more than just taxes. You want to think about whether any future appreciation in the stock after 2012 may be worth more than the tax savings achieved by selling this year, as explained in our article How Tax Rate Changes Impact Your Stock Grant Strategies (Part 3): Incentive Stock Options.

Alert: The 3.8% surtax does not apply to income from stock option exercises, restricted stock/RSU vesting, or the purchase of ESPP shares. It applies only to the gains from selling shares that have been held. However, income from exercise/vesting/purchase will increase compensation income, which can trigger the higher tax rates on other investment sales and also the 0.9% additional Medicare tax (discussed below) on that income.

Medicare Tax Increase On Compensation

For these same taxpayers with high incomes, the Medicare tax will also rise in 2013, from 1.45% to 2.35%. For details about the planning impact this will have on stock compensation, along with IRS guidelines about the tax increase, see the rest of this FAQ.

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How may the withholding taxes on my equity compensation change in 2013?

Tax rates on ordinary income are currently scheduled to change when the Bush tax cuts finally expire at the end of 2012. If no new tax legislation were to be passed, this would raise the flat withholding rate on supplemental wage income, such as stock compensation, to 28% for amounts under $1 million in a calendar year and 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%.

See a related FAQ for a table outlining the income levels that trigger changes in tax withholding.

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For information on the Think Twice video series, trailers showing excerpts of the videos, and a free white paper on insider trading prevention and education, see the Think Twice website. Both DVD and VHS formats are available. Qualified corporate buyers, including new IPO companies, can request free previews. Intranet licensing is available.

New Research Shows Latest Trends In Equity Awards

During 2012, the compensation research firm Equilar studied equity award trends and reported the results in its C-Suite Magazine (see "Equity Trends: 2012—A Move Away From Options" on page 24). Equilar's study, which looked at trends in the stock-based compensation footnotes of proxy statements, examined stock grant practices at companies in the S&P 1500 from 2007 through 2011. The firm observed a continuing shift away from stock options and toward restricted stock, RSUs, and performance shares during this period.

While the number of companies granting both types of equity compensation remained fairly stable, there were significant changes in the percentage of companies granting only stock options and only restricted stock.

Year Options only Restricted stock only Both Neither
2007 16% 17.2% 63% 3.8%
2008 12.9% 20% 64.8% 2.4%
2009 9.9% 21.4% 65.7% 3%
2010 7.3% 23.8% 66.4% 2.5%
2011 6.4% 27.9% 63.7% 2.1%

Other findings by Equilar included the following:

  • The percentage of the S&P 1500 that granted options during the period of study fell from 79% in 2007 to 70% in 2011. This occurred despite an uptick in option grants during the downturn years of 2008 and 2009, when companies briefly granted a higher number of options to take advantage of depressed stock prices. The market recovery of 2010 and 2011, however, prompted a return to the trend toward grants of restricted stock/RSUs that has been developing over the past decade.
  • During the studied period, there was a sharp increase in the use of restricted stock. In 2007, 80.2% of the companies were granting restricted stock, and by 2011 this figure had risen to almost 92%, meaning that restricted stock is now almost universal among the S&P 1500. Equilar notes that most of this increase took place during 2007 and 2008, and since then the number of shares granted has remained flat.
  • The use of performance features continues to grow. Among 656 companies that had filed their proxy statements by March 23, 2012, over half (56.1%) revealed that they had used some type of performance-based incentive in equity awards to CEOs during 2011.
  • At S&P 1500 companies granting options and restricted stock, the median rate of overhang fell from 6.2% in 2007 to 5.4% in 2011. The median run rate (or burn rate) was 1.62% in 2007, briefly rose to 1.82% in 2009 as the companies made extra equity grants to compensate for falling stock prices, and then dropped to 1.55% in 2011.

For more survey data about trends in stock compensation, see our FAQ on this topic.

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Back To School: Two Exclusive New Stock Comp Articles For Executive Education And Compliance

As tangy autumn breezes enhance that back-to-school feeling, we at have published a pair of exclusive new articles for executive education about stock compensation and related issues. In a two-part series, Compliance Concerns That Executives Must Understand To Prevent SEC, IRS, And Corporate Problems, compensation expert Richard Friedman of The Ayco Company explains his 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 Part 1 focuses on compliance issues involving company stock holdings and transactions, including the topics of 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 rules.

Meanwhile, compensation and benefits attorney Michael Melbinger, of Winston & Strawn in Chicago, has written an article specifically on the unique equity-award tax issues faced by non-US executives preparing to work in the United States. Foreign Executives Transferring To The United States: Tax-Planning Strategies For Equity Compensation outlines the significant tax and estate-planning opportunities—and traps—that exist for foreign executives coming to America.

At, 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.

How to Maximize the Value of Your Equity Compensation!

Maximizing the value of your company stock and option grants requires a decision framework that facilitates a series of timely and prudent diversification decisions over many years. Research shows that most option-holders exercise their grants either when they are about to expire or when they need money. This approach is risky because the company stock price may be down at these times. Here are 5 things you need to know to determine the optimal time to take action:

  1. Your Insight Ratios: A metric quantifying the potential remaining in your stock options compared to their intrinsic value.
  2. How small changes in stock price can yield large incremental increases and/or decreases in grant value (the leverage effect).
  3. The stock price at which your financial goal is attained.
  4. Your level of concentration in company stock and options.
  5. Your Forfeit Value: The full value (time value + in-the-money value) you leave behind when terminating prior to retirement. provides this information and automated email alerts that facilitate timely and prudent decisions. A free 30-day trial is available and an annual subscription is only $95 (for stock plan participants).

Tax Planning For Nonqualified Deferred Compensation: Does Deferral Make Sense With Higher Tax Rates Ahead?

In addition to, we publish a separate website:, all about nonqualified deferred compensation (NQDC). As in the area of stock compensation, the world of nonqualified deferred compensation is also wondering about the impact of future tax rates on the value of amounts deferred through NQDC plans—especially since deferral elections are often made in the 4th quarter of the year. Perhaps surprisingly, the strong value of NQDC deferrals persists and even grows if tax rates are expected to rise in the future. Two articles by our contributing experts demonstrate this: The Growing Importance Of Nonqualified Deferred Compensation Amid Rising Tax Rates by Andy Shourds and Advantages To Deferring Income In An Uncertain Tax Environment by Steve Broadbent and Chris Nyland. As these authors indicate, the power of tax-deferred saving and investing through NQDC plans often persists even if the participant's income tax rate is expected to be higher at the time of payout than it is at the time of deferral.

Assuming a pre-tax deferral is attractive, what about NQDC participation in light of expected tax-rate increases? Is it better to take the compensation now, pay current taxes at lower ordinary income rates than those expected in the future, reinvest the net amount, and then sell it later at capital gains rates? Or is it better to defer the income and taxes on it today and pay a greater total amount of taxes when it is distributed in the future? The answer depends on three factors:

  • the calculation of current and future tax rates for both ordinary income and capital gains
  • the investment return on the compensation deferred
  • the growth of the alternative investment(s) for the after-tax amount of the compensation without deferral

Most of the time, the future value from the tax-deferred growth of the compensation, including investment earnings, will exceed the future value of that compensation without deferral. In short, participants are starting with a much bigger pre-tax sum that grows in a tax-deferred way, instead of paying taxes on their compensation earlier by forgoing deferral and then investing the smaller net after-tax amount. Even though participants may owe more taxes in the end, the net after-tax value of the deferred amount is larger.

The power of tax-deferred saving and investing through NQDC plans can also be shown by running numbers through our Deferral Choices Comparison Calculator at While this tool is a great starting point, consult a financial advisor and read our content on before making any decisions about how much income to defer or about investment choices.

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Catch Us At NASPP And FPA Conferences In October

We are excited about the NASPP annual conference in New Orleans (October 8–11). As always, will have its cheerful booth in the exhibit hall. If you will attend the conference, please stop by for a chat! Before then, those at the Financial Planning Association's annual conference, FPA Experience 2012 in San Antonio, will have a chance to hear our Editor-in-Chief Bruce Brumberg speak on September 30. His talk, What Advisors Really Need To Know About Executive & Employee Compensation, will cover the latest issues and trends for financial planners to focus on when working with clients who have stock compensation, nonqualified deferred compensation, or annual incentive plans.

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