Executives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.
RSUs vs. restricted stock
RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.
But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.
Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).
However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.
If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us. The rules are complex, and careful tax planning is critical.
The top alternative minimum tax (AMT) rate is 28%, compared to the top regular ordinary-income tax rate of 39.6%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it.
Midyear is a good time to check on whether any events in your financial life during the first six months of the year make it likely you’ll owe the AMT when you file your 2016 return.
You’ll be subject to the AMT if your AMT liability is greater than your regular tax liability. Some income items that might trigger the AMT include:
Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes,
Accelerated depreciation adjustments and related gain or loss differences when assets are sold,
Tax-exempt interest on certain private-activity municipal bonds, and
The exercise of incentive stock options.
Income isn’t the only thing that can trigger the AMT. So can deductions, because many popular deductions aren’t allowed under the AMT, such as state and local income and property tax deductions.
Avoiding or reducing AMT
If it looks like you could be subject to the AMT in 2016, consider accelerating income into this year. This may allow you to benefit from the lower maximum AMT rate. And deferring expenses you can’t deduct for AMT purposes may allow you to preserve those deductions. If you also defer expenses you can deduct for AMT purposes, the deductions may become more valuable because of the higher maximum regular tax rate.
For help assessing whether you could be subject to the AMT this year — or for more ideas on minimizing any negative consequences from the AMT — please contact us.
With health care costs continuing to climb, tax-friendly ways to pay for these expenses are more attractive than ever. Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three accounts? Here’s an overview:
HSA. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for self-only coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.
You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
FSA. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses.
What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
HRA. An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
Questions? We’d be happy to answer them — or discuss other ways to save taxes in relation to your health care expenses.