Impact of Tax Relief Act on stock compensation and year-end planning
See http://bit.ly/hXdOgT on myStockOptions.com.
The new Tax Relief Law of 2010 has an immediate impact in 2010 and extends the current tax rates through 2012. myStockOptions.com sees at least eight key points related to equity compensation and year-end planning that are important, including the AMT income exemption amounts for 2010/11.
1. With the extension of the current tax rates, you will not need to give your immediate attention to all of the analysis about accelerating income into 2010 (e.g. exercising stock options, selling appreciated company stock, pro rata vesting of performance shares, or early cash bonuses) and delaying deductions into 2011. This will make these last two weeks of 2010 much less active for financial and tax decisions than they could have been. The insights and ideas in our year-end planning articles and FAQs on myStockOptions.com (http://www.mystockoptions.com/) remain useful to your thinking about these decisions.
If the uncertainty over rising tax rates in the long term concerns you (either the possible expiration of the tax-cut extension in 2013 or perhaps a serious effort at tax reform), then you will want to review our article series under Financial Planning: Advanced on the effect of tax rate increases on your strategies for NQSOs, restricted stock, and ISOs.
Concerns about the possibility of higher tax rates in the future are not unjustified given the global trend towards higher taxes to address budget deficits. Many countries have increased taxes, particularly on stock compensation (See the Global Tax Guide on myStockOptions.com at http://www.mystockoptions.com/taxguide/ )
2. The most meaningful new provision is the 2% cut in the Social Security tax rate, from 6.2% to 4.2% (Medicare remains uncapped at 1.45%). This reduces your Social Security tax maximum from $6,621.60 to $4,485.60, a savings of $2,136 ($4,272 for married couples). If you are not normally over the Social Security wage-base maximum ($106,800 in 2010 with no increase in 2011), then you may want to consider delaying any NQSOs exercises until 2011. This would reduce your taxes by 2% on exercise income up to the yearly cap. It does not appear that there will be income phaseouts for this 2% reduction in Social Security tax, as there are in the Making Work Pay Credit as it applies to Social Security taxes in 2010.
To read the other six points and more of our analysis see this link at:
http://www.mystockoptions.com/faq/index.cfm/ObjectID/7C80AFC2-AA32-45AC-B95DC2B8EB7C4862
Please comment and add your own.
The full year end planning newsletter that covers other US and global tax developments is available at:
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Bruce,
Thanks for the insight.
For stock admin professional the change int he Social Security means something new.
For the first time in many years stock admin pros and their outsourcing providers will need to change the tax rates in their systems. People should look inot this now and test to make sure everything works cirretly.
Companies will also need to go through all of their communications, powerpoints, websites etc. Many company have "hard-coded the rate of 6.2% into their presentations and Q&A docs. They will need to go through everything and make sure that these are corrected. They will also need to make sure that their brokers and other outsourcing partners make these changes by no later than Jan 1, 2011.
Dan and others,
Putting aside the 4.2% rate, the maximum amount of compensation that is considered has not changed for 2011 from 2010 (still $106,800), with Medicare uncapped.
How does the payroll staff, stock plan administration, and the company's outsource providers coordinate their efforts to make sure that no more Social Security than the maximum ($4485.60 in 2011) is taken out? For example, what happens when someone exercises NQSOs or RS vests and employee is also about to get a paycheck, which combined would put the employee over the yearly maximum? Is there a best practice that is followed to make sure that more than required amount is not taken out, or it is and then adjustments are made?
Thanks for explaining
An IRS Notice http://www.irs.gov/pub/newsroom/notice_1036.pdf on the early release of the withholding tables for 2011 contains some additional details on the Social Security tax reduction, such as a deadline of January 31, 2011 for implementing it.
The notice is not specific to how the withholding will be handled for supplemental wage income such as stock compensation.