Performance Awards – Income Tax Planning May Help More Than You Think
At 54, Marco’s career has progressed beyond his expectations*, as a well-compensated president of a biotech firm. The board has voted to relocate the company to the Midwest next year. He is weighing several options. He can either move his family – his wife and 16-year old daughter; commute each week to the Midwest; or “retire” of his own will and pursue some other dreams, goals and plans.
To move or not to move is a multivariate equation, involving professional, family and financial considerations, including income tax planning. He has planned well and has the option to retire, which he prefers over relocating his family.
One factor in Marco’s case is a large grant of Performance Stock Units (PSUs). He knows that the company’s stellar performance puts him well ahead of meeting performance share targets. A large grant vests on July 13, 2019, which will trigger payment of FICA tax. The company will not release these shares until January 10, 2020. That’s when ordinary income tax is due, the larger financial outlay.
With the taxable event pushed into 2020, he can pay ordinary income tax at a lower overall tax rate if he retires early in 2020, which coincides with his 55th birthday. He looks forward to the flexibility while he plans his next venture. Of course, had the shares been released later this year, Marco could have opted for a short-term deferral to accelerate the tax liability into the new year.
While Marco’s decision variables are unique, it is never a good idea to let taxes alone drive investment decision-making.
Income tax planning is essential to optimizing performance share awards and other forms of stock-based compensation. As specialists in executive compensation, tax and financial planning, SFG Wealth Planning Services, Inc. can assist you in optimizing your personal financial planning around the timing of these awards as well as your overall personal financial situation.
*The name, likeness, and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.