In general, the taxation of stock options can be more favorable to employees than that of restricted stock. But there are ways to cut down on the tax burden of restricted stock, with a little additional work and planning.
With standard, non-qualified stock options, you don‚t start paying taxes until you exercise them. With restricted stock, you‚re subject to income taxes the day this equity vests–whether or not you sell the shares.
To potentially cut down on the tax bill with restricted stock, consider a "section 83(b) election," which basically allows you to pay income tax on the value of the equity at the time it‚s granted instead of when it vests. The benefit of doing so is that any gain in the stock‚s value up until the time it vests will be taxed at the long-term capital gains rate instead of the ordinary income tax rate of up to 35%.
Of course, you‚re taking a risk by doing this because you‚re paying taxes on a benefit that you don‚t yet have in hand. So if you leave the company before the stock vests, don‚t meet certain performance standards or the share price falls significantly, then you‚ll get little or no benefit from your calculated move.
The IRS doesn‚t even have a form for this type of transaction, which must be filed with the Internal Revenue Service within 30 days of receiving the restricted stock, so taxpayers just need to file a written statement with the agency. See IRS Regulation 1.83-2(e), at www.irs.gov, for details about what should be included in the statement.
IRS Rules Make Catch-Up Retirement Contributions More Attractive
"Catch-up" contributions may be coming to a workplace retirement plan near you.
Final regulations recently issued by the Internal Revenue Service clarify how and to whom catch-up contributions–which allow workers over the age of 50 to contribute more than the annual limit on 401(k), 403(b) and governmental 457 plans–can be applied.
As of 2003, workers over the age of 50 can sock away up to $2,000 on top of the $12,000 annual pretax contribution limit. The catch-up contribution increases by $1,000 a year until it reaches $5,000 in 2006.
The provision, introduced as a part of the Economic Growth and Tax Relief Reconciliation Act of 2001, has been greeted halfheartedly by companies because of concerns about interpretation and complexity of implementation.
Currently, anywhere between a third to half of large employers offer catch-up contributions, according to industry estimates. But the IRS guidance is expected to lead to more employers doing so in the next few years.