2000 Tax Guide: Tips for Executives

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Chapter 3
Tips for Executives
Tax Strategies for 2001

Know your
stock options,
and know
your competitors.

Convert ordinary income to capital gains with a section 83(b) election. Section 83 imposes ordinary income tax on property (such as restricted stock, but not stock options) received as compensation for services, as soon as the property becomes vested and transferable. If you receive eligible property, you can elect under subsection 83(b) to recognize immediately as income the value of the property received (that is, the fair market value less any amount paid toward the property) and convert all future appreciation to capital gain income. Careful planning is required to make sure you comply with strict section 83(b) rules and avoid less favorable tax treatment in the event of subsequent forfeiture. Consult your tax adviser before making this election.

Understand stock options. Stock options can provide you with a share of the success of the company to which you have contributed. Nonqualified stock options (NQSOs) are flexible, but trigger ordinary income tax on the appreciation "captured" upon exercise of the options. There is also potential liability for capital gains tax on appreciation realized on the later sale of the stock. Incentive stock options (ISOs) must be retained for at least the required holding period (two years from grant and one year from exercise), but if you can satisfy that requirement, the future appreciation over the exercise price will be subject to tax at capital gains rates rather than the higher rates that apply to ordinary income. This tax is payable only when you sell the stock. Consult your tax adviser about the rules and limitations on NQSOs and ISOs. If your employer stock options are transferable, estate planning considerations should be reviewed.

Convert group term insurance to a split-dollar policy. Split-dollar life insurance can help both employers and employees. The employer can be reimbursed for any out-of-pocket cost, and the employee has better long-term coverage.

Consider benchmarking compensation and benefits with competitor companies. You should periodically review the compensation, employee benefits, and perquisites given by other similar companies to ensure that your employment package and those of other key employees are competitive.

Review disability insurance options. If you pay the disability insurance premium, any disability benefits paid to you will not be taxable. This would mean that you need less coverage than you would under a policy whose premiums are being paid by your employer.

Assess deferred compensation plans. Based on your current cash flow needs, determine whether you can take advantage of any deferred compensation plans offered by your company. Before you make a final decision, assess the investment alternatives inside the plan, the credit risk of the plan, and the distribution options available. Deferred compensation is discussed in Chapters 5 and Chapter 6.

Review retirement plan distributions carefully. In light of the current difference between the highest ordinary income tax rate and the lower capital gain tax rates, you should closely assess the effect of taking an outright lump-sum distribution from a qualified plan as opposed to rolling part or all of the plan balance over to an IRA. Especially if your plan contains employer stock, special tax treatments, including trustees’ cost basis and tax averaging, may create beneficial income and estate and gift tax planning considerations. Consult an adviser on this complex issue. Distributions are discussed in Chapter 6.

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