Should you monetize stocks or options now?
Dec 17, 2012 | Our Perspectives Archive
Now is the time for U.S. corporate executives to consider taking advantage of opportunities that are available in 2012, but which may not be as of January 1, 2013.
Earned income—Consider, for example, exercising your stock options in 2012. The top federal earned income rate on the sale of those options is 36.45% in 2012. This rate is scheduled to jump to 41.95% on January 1, 2013. (These rates include the Medicare tax increase on earned income from 1.45% in 2012 to 2.35% in 2013.)
What difference can a year make? Our analysis shows that exercising a nonqualified stock option in 2012 with a strike price of $20 and current value of $40 results in 9% more wealth compared to exercising at the same price in 2013 (if the rates increase as scheduled).
Capital gains—This also is a good year to consider diversifying out of concentrated stock positions. The top federal rate on capital gains also is set to rise on January 1, 2013—in this case, from a current low of just 15% up to 23.8%. (Again, this includes a Medicare tax rate; in 2013, it will be 3.8% on unearned income.)
Our analysis found that selling a $100 asset with a cost basis of $20 at 2012’s favorable long-term capital gains rate would increase the after-tax proceeds by 9%.
Deferred compensation—Fast approaching is the annual December 31 deadline for corporate executives to elect to defer their performance-based compensation, which is a good choice when you do not immediately need the income and have a reasonably long time horizon for the deferral.
In theory, the longer you defer, the better, because you are postponing your tax liability on that compensation and any growth on those assets. Yet, deferring is not without risks: Rising interest rates may lower the value of lump-sum payouts; also, nonqualified deferred compensation plans are subject to the credit risk of the company.
If you are going to need to take the income and pay the income taxes due on deferred compensation, consider doing so in 2012 while income rates are lower.
Tax rates are due to increase as a result of two laws:
- The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended Bush-era tax breaks
- The Patient Protection and Affordable Care Act, which is informally known as “Obamacare”
It is unclear what the fate of either of these laws will be. It is therefore unclear whether the tax hikes will take effect as scheduled. However, you may want to take advantage of 2012’s lower tax rates now rather than wait to see what, if anything, President Obama and the new Congress may do.
J.P. Morgan advisors are available to help you and your professional advisors assess and plan for your individual circumstances.
We invite you to contact us and a J.P. Morgan representative will be in touch with you.
This information is provided for informational purposes only and does not constitute a solicitation for any product or service offered by J.P. Morgan or any of its affiliates. The views expressed herein may not be suitable for all investors. This material is distributed with the understanding that we are not rendering any accounting, legal or tax advice. You should consult with your independent advisors concerning such matters.