BFSG Blog - Page 2 of 112 - Benefit Financial Services Group

There was a big repricing of inflation expectations over February, as the January Consumer Price Index (CPI) showed an uptick in inflation and the January Jobs report was much stronger than expected. Here are 3 things you need to know:

1. 2yr U.S. inflation breakevens were up +85 basis points (bps) to 3.18%, having ended January at just 2.33%. This was the second largest monthly move higher since February 2009 after the +87bps move in October last year. (Source: Deutsche Bank, FRED Economic Data)
2. February saw the 2-year Treasury yield increase more than +70bps and the 10-year Treasury yield increase more than +50bps. Yields move inversely to prices.
3. Bloomberg’s Global Aggregate Bond Index had its worst February since inception in 1990. (Source: Bloomberg Finance LP)

Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.

Indices:

• The Bloomberg Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
• The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
• The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
• The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

After years of numerous delays, the U.S. Department of Homeland Security has once again extended the REAL ID enforcement deadline from May 3, 2023, until May 7, 2025.¹

What is a REAL ID?

A REAL ID is a type of enhanced identification card. The REAL ID Act, passed by Congress in 2005, set minimum security standards for state-issued driver’s licenses and identification cards. Under the Act, residents of every state and territory are required to have a REAL ID-compliant license/identification card, or another acceptable form of identification (such as a passport), in order to:

• Access federal facilities
• Board federally regulated commercial aircraft
• Enter nuclear power plants

When traveling internationally, you will still need your passport for identification purposes, including travel to Canada or Mexico.  If you are traveling domestically, you will only need to show your REAL ID or another acceptable alternative.

In order for a REAL ID license or identification card to be compliant, it must have a star marking on the upper portion of the card.  Enhanced Driver’s Licenses that are issued in Michigan, Minnesota, New York, Vermont and Washington do not have a star marking but are still acceptable alternatives  to REAL ID-compliant cards and will be accepted for official REAL ID purposes.

How Do You Get a REAL ID?

The U.S. Department of Homeland Security (DHS) oversees the enforcement and implementation of the REAL ID Act, but each state’s driver’s licensing agency has its own process for issuing REAL ID-compliant license/identification cards.

In order to obtain a REAL ID, you will need to provide documentation that shows your:

• Full legal name, date of birth, proof of lawful presence (e.g., U.S. passport, birth certificate)
• Social Security Number (Some states may not require physical documentation of your Social Security Number.)
• Two proofs of address of principal residence (e.g., driver’s license, utility bill)

If you have a name change (e.g., marriage, divorce or court order), you will also need to bring in documentation that demonstrates proof of your name change. States may impose additional requirements, so be sure to contact your state’s driver’s licensing agency for more information.

Sources:

1.   U.S. Department of Homeland Security, 2023

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA® Senior Financial Planner

We live in a world that admires hard workers. As we grow up, we try our best to get into the best universities, graduate with honors, and have a solid start to our careers. We dream about having a job with a big title and everything that comes with it; financial liberty, luxurious trips, more time with loved ones, experience, accomplishments, etc.

However, do we know how to maximize the benefits of hard work? Among the essential things we tend to disregard or misunderstand is executive compensation. More specifically, equity compensation is a great tool to grow wealth.

Here are some insights into the different types of compensation that may be available to you and how to take advantage of the benefits offered.

Some Helpful Terms

Before getting into the weeds of three basic forms of stock options that we will review today, let’s review a few terms:

• Grant Date: The date you are given the shares.
• Vest Date: The date your stock options become available to sell the stock options.
• Exercise Date: The date stock options are exercised (you get the right to buy or sell the stocks).

Restricted Stock Units (RSUs):

Restricted Stock Units (RSUs) are the most common form of stock options available these days. Companies favor these types of stock compensation because they don’t require the underlying stock on the balance sheet. In addition, RSUs are offered on a vesting schedule typically over four years.

Let’s assume a company offers 1,000 shares of Restricted Stock that vest 250 shares per year over four years.

As the shares vest each year, the value of the shares is taxed as ordinary income. Let’s assume the stock price is $100 a share on 3/1/23. The employee is then subject to $25,000 (250 shares * $100 per share) in additional taxable income for 2023.

After the stock vests, the employee can take cash and subtract the amount held for taxes after they sell the stock, or they can keep the shares and let them grow over time. It’s generally best to treat RSUs as a cash bonus and sell all the shares, since this is how the IRS treats them from a tax perspective. Then, the money earned can be reinvested to allow for better diversification.

Tips for RSUs

• Treat RSUs like a cash bonus and exercise (sell) them in the same year they vest. You can then reinvest the cash into other investments.
• If you hold the stock after it vests, wait at least one year to take advantage of long-term capital gains tax rates.
• Try to negotiate for non-qualified stock options or incentive stock options to receive a more favorable tax treatment of your stock options.
• You will lose any unvested RSUs when you leave the company.

Non-Qualified Stock Options (NSOs)

Non-qualified stock options (NSOs) work similarly to RSUs, where you receive a specified amount of stock options that vest over time. However, a key difference is how the NSOs are taxed. The NSOs have a stock price called the exercise price that is determined at the time the grant is received.

Unlike RSUs that trigger taxes at the time they vest, NSOs allow the employee to determine when the taxes are triggered. This is done when they exercise the stock options, and the difference between the exercise price and the actual stock price is the amount subject to income taxes.

Assume that 200 shares have vested in ABC stock. The exercise price on the stock is $25, and the current market price is $40. Below is how we calculate the amount subject to taxes.

Non-qualified stock options are more favorable for the employee than RSUs. The employee has a specified period (typically ten years from the date of grant) that they can choose to exercise the stock options. When they exercise, you can take the cash minus taxes or hold the shares. With NSOs (and ISOs, which we cover next), you can choose an 83(b) election that triggers taxes in the short term but can lower taxes over the long term. An 83(b) election has to be made when you receive the stock options (at the date of grant) and essentially requests the IRS to recognize income on the stock options now.

By paying income taxes on the grant when you receive them, you switch the growth of the stock options from the income tax rate to the lower long-term capital gains tax rates. 

Tips for NSOs

• Any NSOs not exercised when you leave the company will be lost.
• You can wait until the deadline (which can be as long as ten years) to exercise. This provides more flexibility from a tax perspective.
• When you exercise the stock option, you can take the stock or cash. However, if you choose to hold the stock, it’s best to wait at least one year to sell it and take advantage of long-term capital gains.
• Get insights from an expert to see if an 83(b) election is right for you.

Incentive Stock Options (ISOs)

The unicorn of stock options is Incentivized Stock Options (ISOs). These are the most favorable for an employee from a tax perspective. There are many rules around ISOs, which are common for employees working for start-ups in the tech space.

Since it’s difficult for them to compete for talent with the bigger names in the tech space, they have relied on ISOs as a critical differentiator to attract top talent. For most, ISOs work similarly to NSOs, where you pay taxes on the bargain element. However, the key difference is that with ISOs, you pay no taxes at the time of exercise and get more favorable tax treatment at long-term capital gains rates, if you meet certain requirements.

To get preferential tax treatment:

1. You must hold the stock for at least two years from the date of the grant
2. You must keep the stock for at least one year from the time of exercise.

Let’s take a look at the same example as the NSO above. We see the same $3,000 amount is subject to taxes. The difference is that the $3,000 for an NSO is taxed as income (highest rate is 37%) while for an ISO the $3,000 is taxed as capital gains (highest rate is 23.8%).

It’s imperative that you work with a Certified Financial Planner™ professional when working with ISOs. Aside from the complex holding period requirements, there are also additional requirements. For example, on the date you exercise (not sell!) the options, you trigger potential Alternative Minimum Tax (AMT) issues.

The IRS also limits individuals to $100,000 in ISOs annually. Any amount exercised over $100,000 loses ISO treatment and is taxed like an NSO. Careful planning is required for ISO treatment, and you must remember this if you are considering switching employers.

Tips for ISOs

• Hold ISOs for at least two years from the date of grant, and at least one year from the date of exercise to get preferred tax treatment.
• It may be beneficial to intentionally trigger the NSO tax treatment for some ISOs (for example, leaving your current employer for a better position). A Certified Financial Planner™ professional or tax professional can help you understand and implement this strategy if necessary.
• In a down stock year, working with a professional and maximizing how many options to exercise is beneficial.
• Work with an expert to see if an 83(b) election makes sense since it can lower your AMT tax burden.

Employee Stock Purchase Plan (ESPP)

While technically, this isn’t specific to executive compensation, ESPPs are an essential benefit offered by many employers that is underutilized and misunderstood. An employee stock purchase plan (ESPP) allows employees to purchase their employer’s stock, typically at a 5% – 15% discount. So, for example, if the stock is $20 per share and the company offers a 10% discount, the employee pays $18 per share. Additionally, they’ve had a $2 gain on the stock from day one. Typically, these stock purchases are made via payroll deductions like other benefits.

Participating in an ESPP can be an important strategy to accomplish your financial goals. For example, getting a discount on your stock purchase and holding it so it can appreciate over time is a good strategy to accumulate wealth.

The taxes on ESPP plans can be complex since not all plans are the same. The discount is taxed as ordinary income at the time of purchase. You will then pay taxes on the stock gains when you sell it (either short-term or long-term capital gains tax, depending on your holding period).

Tips for ESPPs

• ESPPs are a great way to accumulate wealth over time.
• Perform cash flow planning to help determine how much to contribute to an ESPP. You don’t want to save so much that you have trouble paying monthly bills.
• Be aware of stock concentration risk. We all remember Enron and the employees whose stock ended up being worthless.

The Bottom Line

Whether you are evaluating offered RSUs, NSOs, ISOs, or ESPPs, make sure you understand how to plan for taxes. This can be your advantage in a world of overachievers and hard workers. As an executive, you can maximize these benefits and reduce dependency on external factors to grow your wealth.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

If you are in the minority of Americans who are contemplating purchasing another home as a rental property or already own a rental property, you are probably doing fairly well in life to be in that position. Without running the numbers on your financial situation, the main question that we hope that you have the answer to is, “What happens to me financially if someone sues me?”. If your answer is anything other than “My household and personal assets are protected and I will be fine”, you hold your financial plan under the microscope and find out where the gaps in your financial plan are. Asset protection strategies like purchasing an umbrella insurance policy or putting your current or future rental property(ies) in an Limited Liability Company (LLC) can help fill in those holes in your financial plan. I’m sure that you worked hard to be in the position financially you are in today and would hate to see your success derailed by a car accident that was your fault or a tenant slipped and fell in your rental home and sued for damages. Let’s walk through a summary of how an umbrella policy and an LLC are used and how they can benefit you.

Umbrella Insurance

An umbrella policy is a type of insurance that is sold in increments of $1 million of coverage and is relatively inexpensive at around $20-40 per month per $1 million of coverage. If we take the example of a car accident that was your fault, the person you hit may not have good health insurance and may require substantial medical bills. If your auto insurance coverage is only good for $500,000, you are personally on the hook for the remainder. Think of auto insurance as a bucket, the money needed to pay the injured person’s medical bills as water, and umbrella insurance as an upside-down umbrella underneath the bucket. Assume that the total cost to make the injured party whole is $750,000. Let’s assume that your auto insurance coverage is only good for $500,000 and in one scenario you have a $1 million umbrella insurance policy and in the other scenario, you do not have umbrella insurance. The diagram below illustrates what happens to you in each case.

I assume that if this was you, you would rather be the person on the left who is dry, thanks to the umbrella policy stepping in and paying the additional $250,000 than having to come out of pocket personally for the $250,000. The person on the right may not have $250,000 in cash to be able to account for this cost and may have to sell stocks in investment accounts, take out a personal loan, or sell a rental property to cover the cost and could end up owing more than $250,000 in the long run due to taxes or loan repayments. This can be costly to your long-term financial goals and could have been resolved with a relatively inexpensive insurance policy.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is an entity that you can establish to allow you to have your rental property(ies) transferred to the LLC to separate your personal property from your rental property(ies). Assume that you have a tenant who slips and falls down your staircase because you didn’t repair the railing after an inspection. The tenant can then sue you for negligence. If that tenant decides to sue you and you have an LLC set up, the tenant is only suing the LLC and cannot go after your personal property. If you do not have an LLC set up, the tenant can also go after your personal property.

Another nice thing about umbrella insurance is that it can also be used to help cover legal damages incurred from a lawsuit at a rental property up to the coverage limits of the umbrella policy. Unlike umbrella insurance, setting up an LLC or multiple LLCs can be expensive to establish and administer. In California, there is an annual $800 fee that must be paid each year until you cancel your LLC. We also recommend that you go to a reputable attorney to establish the LLC and attorney fees can range from a few hundred dollars to a few thousand dollars. Properties owned outside your state of domicile might also require a separate LLC for each state you own real estate in.

Summary

The exact amount of umbrella coverage and whether or not an LLC is appropriate in your situation depends on your unique financial situation and if you are unsure of how to implement these asset protection strategies, our team of CFP® professionals at BFSG can diagnose your financial plan to help determine what asset protection strategies are appropriate for you. Please feel free to reach out to us at financialplanning@bfsg.com or give us a call at 714-282-1566.

Sources:

1. https://www.bankrate.com/insurance/homeowners-insurance/home-ownership-statistics/#stats
2. https://www.ace.aaa.com/insurance/personal-umbrella-insurance.html
3. https://www.investopedia.com/articles/investing/121015/real-estate-trust-or-llc-helping-landlords-choose.asp

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The IRS announced that the starting date for when it would accept and process 2022 tax-year returns was Monday, January 23, 2023.

Tips for making filing easier

To speed refunds and help with tax filing, the IRS suggests the following:

• Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2023. You may need to allow additional time for mail delivery.
• Go to irs.gov to find the federal individual income tax returns, Form 1040 and Form 1040-SR (available for seniors born before January 2, 1958), and their instructions.
• File electronically and use direct deposit.
• Check irs.gov for the latest tax information.

Key filing dates

Here are several important dates to keep in mind:

• January 13. IRS Free File opened. Free File allows you to file your federal income tax return for free [if your adjusted gross income (AGI) is $73,000 or less] using tax preparation and filing software. You can use Free File Fillable Forms even if your AGI exceeds $73,000 (these forms were not available until January 23). You could file with an IRS Free File partner (tax returns could not be transmitted to the IRS before January 23). Tax software companies may have accepted tax filings in advance.
• January 23. IRS began accepting and processing individual tax returns.
• April 18. Deadline for filing 2022 tax returns (or requesting an extension) for most taxpayers.
• May 15. Deadline for filing 2022 tax returns (or requesting an extension) for California taxpayers that reside in one of the federally declared disaster area and that are eligible for tax relief from the recent storms.
• October 16. Deadline to file for those who requested an extension on their 2022 tax returns.

Awaiting processing of previous tax return?

The IRS is attempting to reduce the inventory of prior-year income tax returns that have not been fully processed due to pandemic-related delays. Taxpayers do not need to wait for their 2021 return to be fully processed to file their 2022 return.

Tax refunds

The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if the return is filed electronically, any tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.