Stock Compensation Planning in the Aftermath of the Tax Relief Act

According to an analysis by mystockoptions.com, the extension of current tax rates means that individuals will not have to give their 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 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,” according to the report.  That said, the report cautions that concerns about the possibility of rising tax rates in the US at some point in the future are “not unjustified”.  

Among the provisions in the new law, the analysis says that the most meaningful new provision is the 2% cut in the Social Security tax rate, from 6.2% to 4.2%, an adjustment that reduces the individual 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,” according to the report, a move that would “reduce your taxes by 2% on exercise income up to the yearly cap”. 

The analysis notes that the tax advantages of one type of stock grant over another will not change (e.g. incentive stock options compared to nonqualified stock options), as the tax rates for ordinary income and capital gains have been extended, and that the withholding rates for supplemental wage income will not change. “This applies to the income at the exercise of NQSOs and stock appreciation rights; the vesting or share delivery of restricted stock, RSUs, and performance shares; and purchases in an employee stock purchase plan that is not tax-qualified,” according to the report.   

Additionally, the analysis notes that those who want to convert a regular IRA to a Roth IRA, which starting this year is possible without any concern over income phaseouts, “…should be aware that 2010 is the only year when you can split the taxes owed from the conversion between two years (2010 and 2011)”.  The report also notes that, “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”. 

Finally, the report notes that the tax exclusion for capital gains stemming from the sale of qualified small business (QSB) stock was temporarily increased by the Small Business Jobs & Credit Act of 2010 until the end of 2010, and that the new tax law extends this provision through 2011.  As a result, the analysis notes that, “for QSB stock issued between September 27, 2010, and the end of 2011, the exclusion is now 100%. The exclusion therefore results in a 0% tax rate on gains from the sale of QSB stock issued between now and the end of 2011, as long as you and the company satisfy certain conditions”. Also, for the duration of this measure, tax-excluded capital gains from QSB stock are also temporarily omitted from the alternative minimum tax (AMT) calculation – an exclusion that helps anyone buying stock in a small private company, including stock from an option exercise or restricted stock vesting, according to the report.