The tax-planning landscape for people with stock compensation has become a little clearer, at least for the new Medicare tax increase starting in 2013. When the Supreme Court upheld the constitutionality of the Affordable Care Act, its decision also ensured the survival of the new law's health-care surtax on investment income, including stock. 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. 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, as this would let you pay just the current 15% top capital gains rate and 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.
For these same taxpayers with high incomes, the Medicare tax will also rise in 2013, from 1.45% to 2.35%. Stock compensation events that can trigger this 0.9% increase in the Medicare tax rate include the exercise of nonqualified stock options and the vesting of restricted stock or RSUs.
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