As most readers of this blog will know, the Tax Relief Act of 2010, the result of a much-discussed and long-awaited compromise between President Obama and Congress, was enacted on December 17. To many people's relief, the aptly named law extends the current tax rates through 2012, with no increases in the rates for ordinary income or capital gains. In light of this development, we quickly published a new FAQ with a concise analysis of the impact this extension has on the year-end financial and tax planning for stock compensation. The analysis comes in the form of eight key points.
With the extension of the current rates, employees will not need to give immediate attention to the question of accelerating income into 2010. In the view of many observers, the most meaningful new provision for stock compensation (and compensation in general) is the 2% cut in the Social Security tax rate, from 6.2% to 4.2%. Among other benefits, this has implications for timing the exercise of nonqualified stock options.
The extension of the current tax rates also creates clear advantages in the conversion of a regular IRA to a Roth IRA before the end of 2010. The tax year 2010 is the only year when the taxes stemming from the conversion can be divided between two years (2010 and 2011). Now that the threat of higher income taxes after 2010 is no longer a deterrent, the extension of the current rates makes splitting the taxes a real benefit. For more on Roth IRA conversions and the role stock compensation can play, see the related article series on myStockOptions.com.
For the full analysis and all eight of the key planning points raised by the 2010 tax law, see the FAQ on myStockOptions.com.
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