This alert summarizes recent tax news that relates to equity compensation, along with some noteworthy additions and updates at As regular users of our website know, we keep our content promptly updated for all developments affecting stock options, restricted stock/RSUs, ESPPs, and the related taxation, financial planning, and securities law. Along with the items below, you can also see a full list of the additions and updates that we made at during the first quarter of 2014.

IRS Clarifies Taxation Of Restricted Stock

The concept of "substantial risk of forfeiture" (SRF) under Internal Revenue Code Section 83 directly affects the timing of:

  • the taxation of restricted stock grants
  • the FICA taxation of RSUs
  • the taxation of nonqualified stock options (in a very limited situation)

In short, for as long as any type of compensation is subject to the possibility of forfeiture, it is not taxed. With restricted stock, income is therefore not recognized while the shares are subject to risk during the vesting period. Once this risk lapses upon vesting, the value of the shares is taxed. The IRS issued final regulations, somewhat similar to the proposed regulations, that confirm and clarify previous IRS revenue rulings, court decisions, and the widely accepted understanding of what constitutes SRFs. For example, the proposed and final regulations confirm that transfer restrictions such as a lockup agreement or potential insider-trading liability are not SRFs. For more details, see the related FAQ at

Proposed Tax Reform Would Affect Stock Compensation

Dave Camp, the Chairman of the House Ways and Means Committee, has distributed a draft of a broad tax-reform law that carries a few proposals aimed at executive and equity compensation. For example, the bill known as the Tax Reform Act of 2014 would eliminate the exception for performance-based compensation (e.g. stock options) from the $1 million deduction limit under Internal Revenue Code (IRC) Section 162(m) and would include the CFO among the covered employees whom the limit applies to. Other proposed tax changes would indirectly affect equity compensation. These proposals include provisions that would end the alternative minimum tax, eliminate IRC Section 409A (which applies to nonqualified deferred compensation), and tax capital gains at 60% of a taxpayer's marginal tax rate. While many experts believe that the bill will not become law, some of the proposed revenue-raising provisions may be separately considered.

What Is Your Tipping Point For The Alternative Minimum Tax?

Each year you must pay either your regular income tax or the alternative minimum tax (AMT), whichever comes out to be higher. For many people, the regular tax always turns out to be greater, so the AMT never comes into play. However, people who live in high-tax states and itemize tax deductions, or who have significant personal exemptions, can easily become subject to the AMT, particularly if they exercise and hold incentive stock options (ISOs) with a big spread. In an FAQ at, we present a set of figures that estimate the tipping point for positive adjustments (e.g. ISO exercises) that, when added back to your taxable income, can trigger the AMT in 2014. For ideas on minimizing the AMT if you have to pay it, see a separate FAQ.

Option Taxation For Internationally Mobile Employees

If stock options are granted and then vest while you are abroad but you exercise them while you are in the US, what is the tax treatment? As long as you are a US tax resident at the time of exercise, the options will be taxable in the United States. You will owe federal tax on the exercise income, along with state tax if you live in a US state that has an income tax. In addition, since the options were earned (i.e. granted and vested) in a foreign jurisdiction, that country may try to tax at least part of the income at option exercise. For further details on this topic, see a new FAQ at To learn about equity-award taxation, including employee-mobility issues, in any of 38 countries around the world, see our Global Tax Guide.

Importance Of Diversification Emphasized By New Article

Through its author's personal example, a new article at presents the dangers of a concentrated stock position, discusses why diversification may be hard for employees with shares from equity compensation, and explores strategies for preserving your net worth. In Your Company Stock: The Importance Of Diversification, CFP Laura Tanner recounts her experience with stock compensation at a company where she used to work as a research scientist, and she explains the lessons she learned. For more insights into investment diversification for employees with equity awards, see our section Financial Planning: Diversification.

Tax Treatment For Disgorgements And Clawbacks

Uncertainty surrounds the tax treatment that applies when an executive must return compensation through a clawback provision. A recent case decided by the US Court of Claims, Nacchio v. United States, involved a disgorgement (as a penalty for insider trading) of stock-sale gains on which taxes had been paid. The court allowed a claim-of-right tax credit under IRC Section 1341. This precedent can apply to most (if not all) Dodd-Frank clawback situations. For more on this topic, see a related FAQ at