Retirement decisions aren’t easy, and with the mixed bag of benefit packages, mistakes can be costly.
The slightest variance of your selected early retirement date could drastically affect pension benefits. A thorough analysis should be made before you or your spouse decides “it is time.”
How many employers have you had over your lifetime? You may have remained at the same desk, but worked for three different companies. Let’s address an election that may come up while you are still employed. t’s called an “83b election” for stock received.
As you may have guessed, the IRS has a thing or two to say in this area. An 83b election may apply if you receive or purchase from your employer stock subject to vesting.
Founders of a company who agree to a stock option plan allowing one to exercise their options before vesting, but subject to a restrictive stock agreement, may also be affected.
What is the 83b election? What happens if you do not file an election?
An 83b election allows you to recognize income at the time of the stock “transfer” or purchase date, rather than when the stock vests. Your capital gains holding period is the purchase or “transfer” date. The alternate is paying income tax on the difference between the price paid for the stock and the market value at the time the stock vests.
This tax is due even if the stock continues to be held. Long-term capital gains treatment will not begin until the vest date if no election is filed. This would mean short term gain tax treatment if the stock is sold shortly thereafter.
What if the 83b election is filed timely (follow closely company and IRS requirements and talk with your adviser before election time)? The income from the stock is recognized at the time of the stock “transfer” rather than at vesting value.
Long-term gains are determined from the initial purchase date of the stock. Many times the purchase price and the fair market value of the stock are the same when transferred to the executive. If so, no income may be recognized when filing the election. Subsequent stock increases in price do not trigger income recognition until you decide to sell. The control is back to you.
The 83b election accelerates the recognition of income and will be important if the stock is expected to increase in value only. When your purchase price is less than the market value, income is recognized at the time of the election.
We like to believe companies have potential to reflect positive results in future share prices. If you do and decide to make the election, a timely notice filing must be made.
There is no actual 83b election form but there are formats that are followed; your company and your advisers can assist you. The election form should include your name, address and tax identification number, describe the stock and relevant dates of transfer as well as the market value and the amount you paid for the shares of stock.
Then, include a statement declaring you provided copies of the election as required by regulations, sign and date the filing.
As a final step, be sure to immediately send a copy of this filing to your company, sending the original with signature requirement upon delivery.
Provide a copy to your CPA for inclusion with your tax filing. Take care to spend the appropriate time and attention on whether you should indeed make an 83b election or not, before you actually receive the stock.
Kim Ciccarelli Kantor is president and founder of Ciccarelli Advisory Services Inc., a family owned and operated firm in Florida and New York, which provides comprehensive financial investment and estate planning services for individuals, families and businesses. Her book is “Preserving Family Wealth & Peace of Mind.”
Ciccarelli Advisory Services Inc. is at 3066 U.S. 41 N., No. 202, Naples. 239-262-6577