Stock Compensation Year-end Checklist 2018: What You Need to Consider

This is the first year-end season when employees with stock compensation must consider the tax changes introduced in 2018 by the Tax Cuts & Jobs Act (TCJA). Fortunately, the new tax law doesn’t make any huge changes in the usual year-end steps that you and your financial advisor should consider when you have stock options, restricted stock/RSUs and company stock holdings.

“Tax reform” is the blanket term often applied to the TCJA, which made two major types of changes in the tax laws for individuals. In some areas, the TCJA made straight-up tax cuts. In others, it restructured or eliminated tax provisions. Each of those two categories affects your year-end strategies differently, as explained below.

Tax-Cut Provisions
The TCJA modified the income tax rate and income ranges of each tax bracket, including the reduction of the top income tax rate from 39.6% to 37%. However, we still have the same number of tax brackets (lucky seven), and the capital gains tax and the Medicare surtaxes remain unchanged.

What this means: Whenever you consider exercising stock options or selling shares at year-end (or recognize any extra income), you need to know your tax bracket. Even with the lower tax rates that took effect in 2018, you still want to consider the income thresholds that would trigger a higher tax rate and the Medicare surtax on investment income.

In general, you want to do the following multi-year planning, just as you did before the TCJA.
1) Keep your yearly income under the thresholds for higher tax rates and know the additional room you have for more income in your 2018 and 2019 tax brackets.
2) Recognize income at times when your yearly income and tax rates may, according to your projections, be lower.

Underwithholding Risk

The flat withholding rates for supplemental wages, including stock compensation, are tied to the seven income tax brackets, so those changed too. For income up to $1 million in a calendar year, the withholding rate is now 22%. For amounts of income in excess of $1 million during a calendar year, the withholding rate is 37%.

What this means: The 22% rate of withholding may not cover all of the taxes you will owe on income from an exercise of nonqualified stock options (NQSOs) or a vesting of restricted stock or restricted stock units. You must therefore know the tax bracket for your total income and assess the need to (1) put money aside to pay the additional taxes with your tax return, (2) increase the withholding on your salary, or (3) pay estimated taxes.

The checklist below summarizes what you need for comprehensive year-end planning with stock compensation.

– Exercises, vestings, and ESPP purchases in current year
– Holdings of NQSOs, ISOs, restricted stock/RSUs, and company shares
– Scheduled vestings in the year ahead, including the end of the cycle for a performance share grant and when payout occurs
– Salary contributions allocated for ESPP purchases

– Deadlines for option or SAR exercises and the expiration dates of option grants
– Expected new grants in year ahead and ESPP enrollment/change dates
– Trading windows and blackouts, company ownership guidelines, and any post-vest holding-period requirements
– Your ability to spread the recognition of income from certain sources over 2018 and 2019
– Your new marginal tax rate after tax reform and whether the flat rate for federal supplemental withholding covers it

– Your situation, including short-term cash needs that may prompt you to sell company stock and/or exercise options
– Whether your decisions should be entirely tax-driven
– Your outlook for both your company’s stock price and your job
– How comfortable you are with your concentration in company stock and whether you should diversify
– Multi-year projections for your income and taxes
– Donations in company shares instead of in cash

Company and brokerage firm statements, whether online or in print. You will need them for tax-return reporting.

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