The clock is running out not only for your Christmas shopping. Time is also ticking down for year-end decisions with grants of restricted stock, restricted stock units (RSUs), and performance shares and any company stock you may own.
Like tastes in festive holiday knitwear, year-end financial and tax planning is very specific to the individual. It depends on a number of personal factors:
- your circumstances
- whether your decisions should be entirely tax-driven
- what you did earlier in the year
- your outlook for your company's stock price
- the prospects for changes in tax law during the year ahead
You want to do multi-year projections with your income and overall financial picture while being aware of the trigger points for:
- higher tax rates on ordinary income, capital gains, and dividends
- the Medicare surtax
- phaseouts for personal exemptions and itemized deductions
Below we present two general strategies that experts often suggest (you can read more in the full article on this topic at myStockOptions.com). Of course, if your situation is very complex or you are confused by tax rules, you should consult a financial advisor.
Editor's Note: See also a related FAQ for ideas on selling company stock at year-end to avoid higher tax rates on projected income in the following year. In addition, other articles discuss year-end planning for stock options and company stock and employee stock purchase plans.
1. Did Your Restricted Stock Or RSUs Vest This Year?
Unlike stock options, which trigger taxes when you choose to exercise them, restricted stock and restricted stock units usually give you no control over the timing of your taxes because you are taxed when the shares/units vest.
Alert: There are two exceptions to this general rule: (1) choosing to be taxed at grant (instead of vesting) by making a Section 83(b) election (which is unavailable for RSUs); and (2) having a special type of restricted stock unit that lets you defer delivery of the shares.
At vesting, you own the stock outright and have taxable W-2 income, along with your other compensation income during the year. Therefore, you may want to time and shift other income around this restricted stock/RSU income in 2015 to avoid triggering a higher income tax rate, the Medicare surtax, or the 20% top capital gains rate. For example, if you have nonqualified stock options (NQSOs) that you plan to exercise and hold, you may want to consider delaying this until early 2016, depending on your projections for your income and tax rates in 2016.
2. Remember The Increased Medicare Rate And The Medicare Surtax
The Medicare tax rate on compensation income (normally 1.45%) is 2.35% for single taxpayers with yearly earned income of more than $200,000 and for joint filers with yearly earned income of more than $250,000. For these people, the additional Medicare tax applies to income from the vesting of restricted stock/RSUs, along with all forms of compensation income. In addition, a 3.8% Medicare surtax applies to investment income, such as dividends and stock sale gains, for people in that same adjusted gross income range. If your income will trigger the surtax next year and you have shares from a restricted stock/RSU vesting that you intend to sell soon, you may want to consider selling in 2015 rather than 2016 to avoid the additional 3.8% tax.
Alert: The 3.8% surtax does not apply to income from restricted stock/RSU vesting. It applies only to the gains from selling shares that have been held. However, income from the vesting will increase your adjusted gross income, which can trigger these higher tax rates on investment sales and also the 0.9% additional Medicare tax on that income. Therefore, you want to consider the value of any future restricted stock/RSU vesting in your tax projections and, if you are planning to sell shares soon, whether to sell in late 2015 rather than in 2016.
Example: You and your spouse expect to have $200,000 of adjusted gross income in 2015 and again in 2016. You hold stocks and mutual funds with a gain of about $40,000 that you intend to sell in 2016 to fund your daughter's college tuition. However, you also have restricted stock units that will vest in 2016, and you project that the shares will provide $50,000 of compensation income. This additional income, plus the capital gains from the sale, will push your yearly income above the $250,000 threshold. Therefore, if you sell the stocks and funds in 2015 instead of 2016, you will avoid the 3.8% tax on the $40,000 of investment income.
For five more year-end tips with restricted stock and RSUs, including ideas to consider if your company's stock price rose or fell, see the full article at myStockOptions.com.
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