By Bill Briggs, Net Worth Strategies, Inc.

This article illustrates the value of doing a comprehensive year-end equity compensation tax planning analysis for executives using StockOpter Pro. The following case analyzes if it is advantageous to sell shares in a concentrated employer stock position at the end of the current year versus the beginning of the next year.

*Note: Although the sample shown below compares tax years 2014 and 2015, StockOpter Pro has been updated for the Tax Cuts & Jobs Act that took effect at the start of 2018 and the analysis process remains the same.

The Case and Assumptions

In this hypothetical case, the client has three tranches (tax lots) of fully vested shares and two partially vested restricted share grants as follows:

YearEnd Analysis Table1

The following two case strategies are compared:

  1. Sale and reinvestment of $1,000,000 in the current year.
  2. Sale and reinvestment of $1,000,000 next year.

The tax assumptions used are such that with no diversification the client’s marginal tax rate would be lower in the current year than next year expecting that the current year sale case would yield the lowest taxes.

Analysis Results

Following is a summary of the calculations for the two cases:

YearEnd Analysis Table2

Contrary to what one would expect, the tax was actually lower ($12,584) with diversification occurring next year (2015). An examination of the calculations revealed this was because significantly more restricted shares vest in 2015 than in 2014. Consequently, when the diversification occurs in 2014 the marginal tax rate is driven up by the capital gains tax on the 2014 sale transaction. In both cases, the marginal tax rate in 2015 is 39.6% because of the ordinary tax on the vesting of shares during that year.

The following table shows the value of the diversified assets (investment account) and employer holdings resulting from each of the cases. The difference between the two cases of $16,768 is highlighted.

YearEnd Analysis Table3

Summary of Conclusions

The ability to quickly change assumptions and run multiple case comparisons is critical to the comprehensive analysis process. The results in this example will differ from other such cases, but the following conclusions are worth noting:

  1. For clients with a significant number of tax lots (often resulting from vesting of restricted shares or exercise of options) and vesting or exercise events it is difficult if not impossible to determine the best strategy without a comprehensive analysis.
  2. In many and probably most cases, the tax and wealth accumulation differences from taking action this year versus next year are likely to be relatively small.
  3. Even if the differences are small, the comprehensive analysis process using StockOpter Pro reassures clients that they are not missing any opportunities in taking the recommended action.
  4. Advisors that are not licensed to give tax advice can provide the StockOpter Pro analysis to the client’s tax advisor for verification which may lead to referrals.

Bill Briggs spent 26 years with the IBM Corporation serving in management positions in sales, marketing, product development and financial and strategic planning. Bill also spent seven years providing financial planning services in the Bend, OR area prior to founding Net Worth Strategies, Inc. in 1999. Bill was the CEO and President of Net Worth Strategies until January 1, 2018.  He spearheaded the development of StockOpter Pro. For more information and a free demo visit www.stockopter.com.

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