The NASPP Blog

Back in February, I blogged about tax rate increases in the UK. Now that we’ve gotten past the end of the UK tax year, it’s time to focus on the United States. Although not quite as dramatic, tax rates are expected to increase here beginning next year–yep, just six months from now.

What Did You Expect With a Democratic Administration?

The tax rates that are in effect now are a legacy of the Bush administration and are due to expire at the end of this year. As it stands now, all individual tax rates are expected to increase beginning in 2011. Ordinary income tax rates and short-term capital gains rates currently range from 10% to 35% and will increase to 15% to 39.6%. Long-term capital gains are currently taxed at 15%; this will increase to 20%.

In addition, the tax rate on qualified dividends will increase from 15% to the new ordinary income tax rates. This isn’t such a big deal for stock compensation, since dividends on unvested stock awards are usually already taxed at ordinary income tax rates, but where employees are receiving dividends on vested stock that they hold, this could be important for them to know.

Prior limitations on personal exemptions and itemized deductions will also be reinstated and the estate tax will be restored.

Will Congress Save Us From These Taxes?

Wholesale relief is not expected and an act of Congress is required to extend any of the Bush tax cuts. As daunting as that sounds, I understand that the Obama administration has indicated support for extending the current tax rates for low to middle-income taxpayers. It seems fairly certain, however, that the expected increases in tax rates that apply at higher income levels will happen. Ditto for the increase in the long-term capital gains rate, reductions in allowable personal exemptions, and limitations on itemized deductions. Short-term capital gains are taxed at the same rates as ordinary income, so whatever happens to ordinary income rates will also apply to short-term capital gains. There seems to be some question about what will happen to the qualified dividend rate.

What Isn’t Changing?

The two tax rates that aren’t changing are the rates that apply under the Alternative Minimum Tax–this may be the first good news we’ve heard for ISOs in a long time. If ordinary income tax rates increase but AMT rates stay the same, then ISO exercises will be less likely to trigger AMT liability. And with ordinary income tax rates increasing, holding ISO shares long enough to convert the spread at exercise to a long-term capital gain may be more tempting for employees.

Tax Withholding Rates

Tax withholding rates for federal income tax purposes are based on the marginal income tax rates so when those rates increase, so do the withholding rates that apply to compensation.

There are two rates that apply to supplemental payments (which include NQSO exercises and vesting/payout events for awards):

• If all the current tax rates are allowed to expire, the optional flat rate that can be applied to supplemental payments will increase from 25% to 28% (some of you may remember that this is what the rate used to be, nine years or so ago).
• The mandatory rate that applies to supplemental payments to individuals that have already received more than $1,000,000 in supplemental payments during the year is the maximum individual tax rate–which is expected to increase to 39.6%.

For companies that allow share withholding on restricted stock and unit awards (most of you that grant these awards), these expected changes could have implications at the corporate level, not just the individual level, since the amount of cash the company will need to make available to cover the tax payments will increase.

More to Come?

And this is just the beginning. Additional tax rate increases will go into effect in 2013 to fund President Obama’s health care reform package.

Planning for the Tax Increases

Just as with the UK increases I blogged about in February, advance planning and employee communication is key. Employees that have accrued considerable appreciation in NQSOs may want to exercise this year, while tax rates are lower. Employees that hold stock that has appreciated significantly in value may want to consider selling–although here the decision is complicated by the different tax rates that may apply depending on how long the shares have been held (i.e., short-term vs. long-term capital gains rates).

The good news is that the NASPP has scheduled a webcast to review the impending tax rate changes and planning considerations–be sure to tune in next Tuesday, July 27, for “How Upcoming Tax Rate Changes Impact Your Stock Plans” with Bill Dunn and Sheryl Eighner from PricewaterhouseCoopers.

18th Annual NASPP Conference
Hear about all the latest tax developments impacting stock and executive compensation–straight from the IRS and Treasury–at the 18th Annual NASPP Conference. The Conference will be held from September 20-23 in Chicago; register today.

NASPP New Member Referral Program
Refer new members to the NASPP and your NASPP Conference registration could be free.  You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!   

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

• Register for the 18th Annual NASPP Conference.
• Refer new members to the NASPP so you qualify for the July raffle and Conference discount available through our New Member Referral Program.
• Complete the Compliance-O-Meter quiz on Resourcefulness.
• Take the “Question of the Week” challenge.
• Renew your NASPP membership for 2010 (if you aren’t an NASPP member, join today).
• Don’t miss the local NASPP chapter meetings in Chicago, Connecticut, Phoenix, Sacramento, and Silicon Valley. I’ll be at the Silicon Valley meeting–I hope to see you there!

– Barbara