Stock Based Compensation Tax Optimization Strategies

Employee Stock Purchase Plans (ESPP), Stock Options, and Restricted Stock Allocations are three of the major forms of stock based compensation. These offers are not yet an established benefit, although many companies do offer at least one of these. Of these only the ESPP plan is generally available to all the employees within an organization.

• ESPP allows for the purchase of company stock at a discount at set time periods in a calendar year (usually July 1 and January 1). The amount of stock that can be purchased is restricted to $25,000 per annum, a federal limit.
• Stock Options give the employee the right to purchase shares at a pre-determined price. This right usually expires after ten years.
• With a Restricted Stock Allocation, the company allocates a certain amount of money over a period of time (usually three years) for the purchase of company stock for employees at set time periods (generally the yearly anniversary after the allocation date).

Taxes can take a large bite of the compensation/benefit associated with these plans. There are some tax optimization opportunities that allows minimizing the tax impact while keeping the overall exposure to the company stock at a reasonable level. The idea is to aim for company stock sales to realize long-term capital gains perpetually. The next post in this series will look at the details of applying this strategy with each of the above plans.

Related Posts:

1. Flexible Spending Accounts (FSA) – Great Benefit with a few caveats! - 03/09.
   
2. Writing Covered Calls against Employer Stock Plan Shares (ESPP, Restricted Stock, and Stock Options) – A Primer - 03/09.
   
3. Employee Stock Purchase Plan (ESPP) and 401K Retirement Plan Annual Enrollment and Contribution Review - 12/08.
4. Employee Stock Purchase Plan (ESPP) - Immediate Selling Strategy - 4/08.
   
5. Realizing Long-Term Capital Gains With Stock Based Compensation - 04/08.
6. Stock Based Compensation Tax Optimization Strategies - 02/08.