#taxplanning

By:  Henry VanBuskirk, CFP®, Wealth Manager

Our team would like to provide an update on a recent blog post discussing tax relief and the tax filing deadline for certain counties in California. The individuals in counties originally discussed in that posting will have until May 15^th, 2023, to file tax returns, but some counties are automatically extending that tax filing deadline to October 16^th, 2023. If you are a resident in one of the following counties, you qualify for additional relief and your tax filing deadline is October 16^th, 2023.

Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Benito, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, San Diego, San Francisco, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, and Yolo

Residents in Alabama and Georgia may also be able to receive tax relief and have the tax filing deadline extended to October 16^th, 2023.

This means that IRA contributions and Health Savings Account (HSA) contributions for Tax Year 2022 may be made as late as October 16^th, 2023. Estimated tax payments normally due on April 18^th, June 15^th, and September 15^th, and the California Passthrough Entity (PTE) payments for all taxpayers in affected areas are due between now and October 16^th.

For those that are claiming disaster-related casualty losses or would like to request copies of tax returns and waive the fee for requesting prior year tax returns, you may do so by completing Form 4684 ‘Casualties and Thefts’ or Form 4506 (or 4506-T) ‘Request for Copy of Tax Return’ (or ‘Request for Transcript of Tax Return’) respectively. Please reference in bold letters at the top of the applicable form “California, severe winter storms, flooding, and mudslides” and reference the FEMA disaster declaration number, FEMA-3591-DR. The IRS also has a disaster hotline (866-562-5227) and FEMA’s website can be used: https://www.disasterassistance.gov/ for any questions on the above deadlines and inquiries on whether or not you qualify for disaster relief.

Please visit the disaster assistance overview page on the IRS website for further guidance if you live in an impacted area.

Please let us know how we can be of help during what may be a difficult time for you and your family.

Sources:

1. https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-severe-winter-storms-flooding-landslides-and-mudslides-in-california.
2. https://www.irs.gov/newsroom/irs-may-15-tax-deadline-extended-to-oct-16-for-disaster-area-taxpayers-in-california-alabama-and-georgia
3. https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-and-emergency-relief-for-individuals-and-businesses

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.

By:  Henry VanBuskirk, CFP®, Wealth Manager

Our thoughts go out to the victims of the recent California storms, and we hope that you and your family are safe. The IRS has declared the following counties to be within a federally declared disaster area and eligible for tax relief.

Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo, and Yuba

If you reside or have business in one of the counties mentioned, you are eligible for the tax relief and the April 18^th deadline has been extended to May 15, 2023. This also means the deadline for tax year 2022 contributions to IRAs or Health Savings Accounts (HSAs) has also been extended to May 15, 2023.

For those making quarterly estimates, for the fourth quarter 2022 and first quarter 2023 estimated tax payments that were due on January 17, 2023, and April 18, 2023, these payments are now due with the 2022 tax return when you file, on or before May 15th.

The quarterly payroll and excise tax returns that are normally due on January 31^st and April 30^th have also had their deadlines extended to May 15^th.

For those that are claiming disaster-related casualty losses or would like to request copies of tax returns and waive the fee for requesting prior year tax returns, you may do so by completing Form 4684 ‘Casualties and Thefts’ or Form 4506 (or 4506-T) ‘Request for Copy of Tax Return’ (or ‘Request for Transcript of Tax Return’) respectively. Please reference in bold letters at the top of the applicable form “California, severe winter storms, flooding, and mudslides” and reference the FEMA disaster declaration number, FEMA-3591-DR. The IRS also has a disaster hotline (866-562-5227) and FEMA’s website can be used for any questions on the above deadlines and inquiry on whether or not you qualify for disaster relief.

We understand that this may be a difficult time for you and your family, and we are ready to help you with any questions that you may have.

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

As the final part of the series, we look at Employee Stock Purchase Plans (ESPP). Although these are not explicitly for executives, this is an important benefit that is not well understood and often underutilized. In case you missed Part 1 on Deferred Comp plans and Part 2 on Stock Options, read here and here, respectively.

Employee Stock Purchase Plan (ESPP)

While technically this is not specific to executive compensation, it is an important benefit offered by many employers that is underutilized and not understood.  An employee stock purchase plan (ESPP) allows any employee to purchase their employer’s stock, typically at a 5% – 15% discount. For example, if the stock is $20 per share and the company offers a 10% discount, the employee pays $18 per share and from day one they have a $2 gain on the stock. Typically, these stock purchases are done via payroll deductions like other benefits. Participating in an ESPP can be an important strategy to accomplish your financial goals. 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 gains of the stock when you sell it (either short-term or long-term capital gains tax depending on your holding period). Speak to a Certified Financial Planner™ professional to understand the tax rules around your particular plan.

Tips for ESPPs

• ESPPs are a great way to accumulate wealth over time.
• Work with a CFP® professional or tax professional to understand the tax implications of your plan.
• Perform cash flow planning to help determine how much to contribute to an ESPP. You do not 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.

As you can see, we have just covered the tip of the iceberg when it comes to understanding executive compensation. It is always best to work with a CFP® professional who can help you understand your benefits and put a plan together to maximize them.

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

In the first part of this series, we reviewed deferred compensation plans. This week we are looking at stock options.

Stock Options

There are 3 basic forms of stock options that we will review today. We will look at them from most to least common:

Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are the most common form of stock options available these days. Companies like them because they are not required to have the underlying stock on the balance sheet of the company. RSUs are offered on a vesting schedule over a period of time. For example, let’s assume a company offers 1,000 shares of Restricted Stock that vest 250 shares per year over four years. Vesting refers to a period of time an employee is required to wait before they can have access to the shares.

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 choose to take cash less the amount held for taxes after they sell the stock, or they can keep the shares and let them potentially grow over time. In general, it is 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.  The money can be reinvested in other investments 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 for 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. 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:

Total Market Price ($40 * 200) – Total Exercise Price ($25 *200) = Bargain Element (Amount subject to taxes)

$8,000 – $5,000 = $3,000 subject to income 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. At the time of exercise, you can choose to 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 at the time 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 at the time you receive them you switch the growth on the stock options from income tax rate to the lower long term capital gains tax rates. It is best to work with a Certified Financial Planner™ or tax professional to see if this makes sense given your situation. 

Tips for NSOs

• Work with a Certified Financial Planner™ professional or tax professional for tax planning (for example exercising more stock options in a year you have a lower income).
• Any NSOs not exercised at the time you leave the company will be lost forever.
• You can wait till the deadline (which can be as long as 10 years) to exercise. This allows you more flexibility from a tax perspective.
• When you exercise the stock option you have the choice of taking the stock or cash. If you choose to hold the stock it is best to wait at least one year to sell the stock to take advantage of long-term capital gains.
• Talk with a tax professional or Certified Financial Planner™ professional 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 and because of their complexity, they are the least common type of stock option.  Themost common place I see these are for key employees that work for start-ups in the tech space. Since it is difficult for them to compete for talent with the bigger names in the tech space they have relied on ISOs as a key differentiator to attract top talent. For the most part, ISOs work very similarly to NSOs where you pay taxes on the bargain element. The key difference though 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 holding requirements (see below).

Total Market Price ($40 * 200) – Total Exercise Price ($25 *200) = Bargain Element (Amount subject to taxes)

$8,000 – $5,000 = $3,000 subject to long-term capital gains taxes

To get preferential tax treatment there are some requirements you must meet:

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

It is imperative that you work with a Certified Financial Planner™ professional when working with ISOs. Aside from the complex holding period requirements, there are additional requirements as well. The date that you exercise (not sell!) the options you trigger potential Alternative Minimum Tax (AMT) issues. The IRS also limits an individual to $100,000 in ISOs in a given year. Any amount over $100,000 loses ISO treatment and is taxed like an NSO. Careful planning is required for ISO treatment and you must keep this in mind if you are considering switching employers.

Tips for ISOs

• You must hold ISOs for at least 2 years from the date of grant and at least 1 year from the date of exercise to get preferred tax treatment.
• Work with a Certified Financial Planner™ professional and tax professional to put together a plan limiting AMT tax issues.
• It may be beneficial to intentionally trigger the NSO tax treatment for a portion of the ISOs (for example, leaving your current employer for a better position). A Certified Financial Planner™ professional or tax professional can help you understand and do this strategy if necessary.
• In a down stock year, it is beneficial to work with a professional and maximize how many options to exercise.
• Work with a Certified Financial Planner™ professional to see if an 83(b) election makes sense, since it can lower your AMT tax burden.

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.