From the Editor
Is it better to exercise options in 2012, when tax rates are lower, or to wait?
Resetting the basis in company stock by selling and buying it
Special articles on year-end financial and tax planning
The 3.8% Medicare surtax on investment income: IRS guidance and regs
Special dividends raise issues for stock comp
Continuing education credits at and


Fidelity Charitable Gift Fund: Non-cash asset donations, such as appreciated securities, may be a more tax-advantaged way for your clients to give (see the ad below)

Think Twice Insider Trading Prevention Videos: Educate, entertain, and jolt your employees and executives into compliance (see the ad below)


Future tax rates on your mind? You're not the only one. Although less than three weeks remain before the current tax law ends at the close of 2012, the tax landscape beyond is still unclear. Will tax rates automatically increase in 2013? Unless a compromise is reached in Washington, tax rates will rise, though so far only the 0.9% Medicare tax increase and new 3.8% Medicare surtax seem to be beyond any possibility of modification.

In the newsletter below, we present two FAQs discussing strategies with stock compensation in light of potential tax increases after 2012. The newsletter also presents our special articles on year-end financial and tax planning, discusses newly issued IRS guidance on the 3.8% Medicare surtax, and covers various other topics of interest to users of

Membership & Licensing

We appreciate your interest in If you do not yet subscribe to Premium or Pro Membership, giving full access to our content and tools, year-end and tax season is a great time to upgrade. All of our content and tools are also available for licensing.

—Bruce Brumberg (Editor-in-Chief)

Return to table of contents

Two FAQs On Year-End Planning In 2012

With the potential for tax-rate increases in 2013, I am thinking about exercising my nonqualified stock options to accelerate income into 2012. What issues do I need to think about?

Before you rush into exercising, you may want to do some calculations with potential future stock prices and tax rates. When you exercise earlier than necessary and pay taxes on your option spread, you lose some of the leverage that stock options offer. Experts feel the likelihood of higher tax rates ahead should not be the only reason for exercising at the end of 2012. The tools on, including the Quick-Take Option calculator, can help you consider various "what if" scenarios.

Here are some general situations where it makes sense to evaluate whether you should exercise options in 2012 rather than later:

  • You were already planning to exercise options in next few years.
  • The options are close to expiration.
  • The options are deep in the money (i.e. there is a big spread between the market price and the exercise price).
  • You need to diversify because your holdings are overly concentrated in company stock.
  • You plan to change jobs soon. (Vested options almost always expire if they are not exercised soon after leaving the company.)

I am thinking about selling some company stock this year, before the new 3.8% Medicare surtax and the potential rise in capital gains tax rates, and then repurchasing it. This would reset the basis. What are the issues I need to consider?

By selling stock at a gain and then buying it back at the current price, you create a new basis in the stock. Because the shares are sold for a gain, there is no wash sale to worry about. The main reason for selling would be to avoid higher capital gains tax rates in a future year and the new Medicare surtax on net investment income. Compare this technique to tax-loss harvesting, in which stock is sold at a loss (without repurchase) to have future losses that can be netted against gains (another year-end planning strategy).

Example: You own company stock worth $100,000. The tax basis is $60,000. If you sell it now, you have $6,000 taxes on a $40,000 gain (at the current 15% capital gains rate). If you buy the stock back at same time, you obtain a $100,000 basis for a future sale.

Before you decide to do the same type of transaction, consider these issues in the situation presented by the example above:

  • Check the size of capital-loss carry-forwards or losses from this year. Depending on your prior tax-loss harvesting, you may have $40,000 in losses to net against gains. If so, you can wait on a sale until the future, as you would not be paying any tax on gains up to that amount.
  • Decide how you will pay the taxes and think about alternative uses of that money.
  • Individuals who may be close to death should consider that the step-up in basis which occurs at death eliminates entirely the tax on the gain (i.e. you would want to wait on the sale).
  • Think about whether a sale would trigger an unwanted disqualifying disposition for shares acquired through an employee stock purchase plan or incentive stock options.
  • Remember that insider-trading rules and company blackouts may prevent sales and purchases. Unless you already have a Rule 10b5-1 plan in place, best practices for these plans usually require more than a few weeks to elapse between the time of plan setup and the first sale under the plan.

Return to table of contents

Special Articles On Year-End Planning

Top Ideas For Year-End Tax Planning With Stock Compensation
Consider year-end or year-beginning tax planning with your stock compensation and company stock holdings. While investment objectives, not tax considerations, should generally drive your decisions, here are several 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 2012 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.

Insider Trading Prevention And Education:
Think Twice Video And Intranet Series
Request free previews at the Think Twice website

Insider trading is back in the news. For two decades, the dramatic Think Twice video series has been a vital training and compliance resource for thousands of corporations and law firms trying to prevent insider-trading violations. The Think Twice videos are celebrated for enhancing the value of corporate education by entertaining viewers with compelling stories.

Used by over 1,000 companies and developed with input from the SEC Enforcement Division, these powerful and memorable story-lines will drive home key points on:

  • what insider trading is
  • the penalties and consequences
  • how the SEC discovers illegal activity
  • what happens if illegal tipping or trading is suspected
  • how SEC investigations are conducted

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.

3.8% Medicare Surtax For Stock Sales And Investment Gains: IRS Guidance And Regulations Issued

Starting in 2013, an extra 3.8% tax will be added to the usual capital gains tax (e.g. on sales of company stock from equity compensation) for people with yearly modified adjusted gross income (MAGI) of more than $200,000 (more than $250,000 for married joint filers). The tax is based on the lesser of either the amount your MAGI exceeds this threshold or your net investment income. You pay this tax through your annual tax return. If you expect to be subject to the surtax, you may want to adjust your withholding or estimated tax payments.

In early December, the IRS issued proposed regulations and frequently asked questions on the 3.8% Medicare surtax, which it calls the Net Investment Income Tax (NIIT). While the NIIT applies to capital gains, dividends, interest, and other investment income, the 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 on that income.

For more details on the NIIT surtax, including strategies for minimizing it, and also on the additional Medicare tax that applies to stock compensation income, see the FAQ on these topics.

Return to table of contents

Impact Of Special Dividends On Stock Comp

With the prospect of dividend tax rates ballooning from 15% up to a potential 39.6% for high-income taxpayers (plus 3.8% for the Medicare surtax), many companies are considering special one-time dividend distributions. When a company pays a dividend, particularly a large special dividend, its stock value declines by the same amount after the ex-dividend date. Depending on any provisions in the stock plan documents for adjustments in outstanding grants in this situation, these special dividends can affect the value of stock options, restricted stock, and other equity awards.

For shareholders, the stock-value decline from the dividend is offset by the cash they receive. However, while dividends are usually paid on restricted stock, as the shares are outstanding, dividends are not paid to optionholders and are usually not paid on restricted stock units (RSUs).

Companies paying dividends because of the lower tax rate on "qualified" dividends may consider whether this places options and RSUs at a disadvantage (unless they pay a dividend equivalent), and they may want to think about how to adjust for this. As explained in an FAQ on, Microsoft did this when making a $3-per-share special dividend in 2004. Many stock plans have provisions that allow for an adjustment or for equity restructurings, such as a special dividend, a stock split, or a spinoff. This can be referred to as an "antidilution provision." For additional details, including the accounting treatment, see a recent edition of the newsletter HRS Insight from PricewaterhouseCoopers.

Return to table of contents

Need CE Credits Before Year-End? Learning Centers At & Offer Credits For CEPs, CFPs, And Other Professionals

As time ticks down on 2012, many professionals with continuing education requirements to meet before year-end will be relieved to learn that and its sister site have courses and exams offering continuing-education credits. At, the Learning Center offers up to 20 credits for for Certified Equity Professionals (CEPs) and up to 15 credits for Certified Financial Planners (CFPs). Each course of study features podcasts, articles, and FAQs from They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.

Built on a similar model, the the Learning Center on nonqualified deferred compensation offers up to 6 continuing education credits for Certified Financial Planners, 6 Professional Achievement in Continuing Education (PACE) credit hours for CLU® and ChFC® certifications, and up to 12 CPE hours for credentialed ASPPA members.

Return to table of contents


If you found this update from useful, please share it with your friends and colleagues, but do not copy or customize the text itself for your company's use without express permission.

Missed an update? Visit the archives.

TO SUBSCRIBE: Visit and register as a new user. Be sure to check the box for our email newsletters.



Return to table of contents