Receiving bonuses in the form of restricted stock, stock options, or nonqualified deferred compensation (NQDC) is typically a celebrated success for executives and other key employees, but tax planning for this type of compensation can be trickier than planning for salaries, bonuses and traditional employee benefits. If you are subject to the additional 0.9% Medicare tax and the net investment income tax (NIIT) as part of the Affordable Care Act (ACA), tax planning gets even more complicated. These taxes apply when certain income exceeds the applicable threshold, which is $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for other taxpayers.
Additional Medicare tax
The following types of exec comp could be subject to the additional 0.9% Medicare tax if your earned income exceeds the applicable threshold:
- Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold
- FMV of restricted stock when it’s awarded if you make a Section 83(b) election
- Bargain element of nonqualified stock options when exercised
- Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture
The following types of gains from stock acquired through exec comp will be included in net investment income and could be subject to the 3.8% NIIT if your modified adjusted gross income (MAGI) exceeds the applicable threshold:
- Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election
- Gain on the sale of stock from an incentive stock option exercise if you meet the holding requirements
Keep in mind that the additional Medicare tax and the NIIT could possibly be eliminated under tax reform or ACA-related legislation.
If you have questions or are concerned about how your executive compensation will be taxed, JLK Rosenberger can help you assess the potential tax impact and implement strategies to reduce it. For more information, call us at 949-860-9902 or click here to contact us.