If you’re an executive or other key employee, your company might reward you for your contributions to your company’s success with special compensation. This could include restricted stock, stock options or nonqualified deferred compensation (NQDC). Tax planning for these forms of executive compensation, or exec comp, is generally more complicated than for salaries, bonuses and traditional employee benefits.
And planning gets even more complicated if you could potentially be subject to two taxes under the Affordable Care Act (ACA). These include the additional 0.9% Medicare tax and the net investment income tax (NIIT). These taxes apply when certain income exceeds the applicable threshold. This threshold 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 you sell it
- 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 you have performed the services and there’s no longer a substantial risk of forfeiture
Your net investment income will include the following types of gains from stock acquired through exec comp. They 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 tax reform or ACA-related legislation could possibly eliminate the additional Medicare tax and the NIIT. If you’re concerned about how the IRS will tax your exec comp, please contact us. We can help you assess the potential tax impact and implement strategies to reduce it.