disqualifying dispositions for stock grants/ESSP

[Jonathan]

http://www.fairmark.com/execcomp/espp/dispositions.htm

Holy fuck, I don't understand what to do here to come up with cash. I can sell shares I've held onto long enough for capital gains and a fully qualified disposition to kick in. I can sell some shares that haven't. I can sell some shares that haven't that also show a capital loss, up to the limit of $3000. I can borrow from my 401k. I can borrow from my 401k with a short repayment period, with the expectation that I will sell stock once it qualifies to cover the loan payments. I can do various combinations of the above. I really don't want to have to pay a dude to think through all this for me, but I might have to.

[Jonathan]

Oh, and I forgot the extra wrinkle that Intel's dividend is payable on Dec 1 to stockholders of record on the 7.

Also, holy fuck, Intel's dividend has gone up 10x over the previous 10 years. I thought the dividend was a significant amount of money now because I owned a bunch of stock, but nah, really it was the fact it went up 2x over the time I first started owning significant quantities of Intel stock.
http://www.intc.com/dividends.cfm

[Jonathan]

You know what? I think maybe this rule doesn't actually apply to stock grants/RSUs, despite my thread title.

[quantus]

Correct, that rule is for ESPP shares only. I haven't really read about the taxation of RSU's yet since I've barely got any shares of those vested. If you're trying to avoid tax on selling ESPP shares, then yes, go for the qualifying disposition. That's why I'm waiting until December to sell any more stock, so I tick over into a qualifying disposition. For us, that probably means getting taxed at 15% instead of 30-35%. Next year, cap gains is likely to be 20%, so don't wait too long to figure out what you're doing. I wouldn't sell shares at a loss unless you had to or don't expect them to ever get out of the red.

If you give a concrete scenario of what you have, I'm sure Vinny will be compulsive enough to create a spreadsheet or program to calculate the best possible combination of things to sell to get to the cash level you need with minimal taxes. Oh, you might be able to gift some assets over as well to avoid a sell and taxes on those items. When do you need the cash by?

[Jonathan]

It's unclear, but 1-4 weeks is likely.

I don't have any ESPP shares showing a loss. I do have RSUs which are under the price at which they vested. That's... not really a loss? I am not sure what it counts for tax-wise, though.

[Jonathan]

The main thing is I have a pile of Intel stock I purchased at $11 or so which is showing a large gain, which was in February 2009, so I want to wait until Feb 2011 or later to sell that off.

So, I could either take out a loan against my 401k for the amount and just pay it back slowly and hold onto the stock, or pay the loan back using a stock sale after the two year period is up.

[quantus]

The main thing is I have a pile of Intel stock I purchased at $11 or so which is showing a large gain, which was in February 2009, so I want to wait until Feb 2011 or later to sell that off.

I'll guess that you're showing a $7k gain on that block of which $2.5k is likely going to taxes in April if you sell it now or closer to $1.2k if you sell in Feb so your $1.3k dilemma is clear.

Anyways, without a list of shares with purchase dates, prices and purchase conditions (ESPP, RSU, open market, etc...), we can only recommend strategic ideas:

• For example, unless this is a gambling debt where someone's gonna break bones to get the money, I'm pretty sure you can ask for more time to liquefy the assets. Maybe you can get an installment plan? At the very least, ask for the 3 months until February!
• Loans against 401k's can take a while to set up and fund, probably longer than your 1-4 week time frame. If you think you need it, start the finding out about the process immediately.

[Jonathan]

It is for the divorce, of course. The entire point of jumping through these hoops is so my ongoing financial relationship is not with her. I'll look into the terms.

[quantus]

The entire point of jumping through these hoops is so my ongoing financial relationship is not with her. I'll look into the terms.

Well, on the bright side, you can actually quantify how much 3 months of financial entanglement is worth to you...

[quantus]

You know what? I think maybe this rule doesn't actually apply to stock grants/RSUs, despite my thread title.

So, I just read up a little on this through my eTrade account's information. You apparently get taxed on the value of the stock you are being granted as it vests at the fair market value on the vesting date. Depending on how your plan works, the tax withholdings are either taken from your paycheck, or taken as a portion of the shares you're granted, or if you sell right away, taken from the proceeds of the sale. Except in that last case, once the taxes are paid, the shares are transferred to you and behave like regular stock as far a future capital gains/losses are concerned.

[Jonathan]

Except in that last case, once the taxes are paid, the shares are transferred to you and behave like regular stock as far a future capital gains/losses are concerned.

Yeah, okay, good. Hm. So I could take a loss on that stock and save some taxes on the RSUs.

[quantus]

Except in that last case, once the taxes are paid, the shares are transferred to you and behave like regular stock as far a future capital gains/losses are concerned.

Yeah, okay, good. Hm. So I could take a loss on that stock and save some taxes on the RSUs.

Technically speaking, you'll get back taxes already paid--maybe only partially because you already paid taxes as if it were income before and may only get the refund as if were long term capital gains now.

[quantus]

IRS Publication on divorce/separation (2009)

Most of the gory details are in the sections about children, which you get to skip and you don't own a house. For the most part, the rest is pretty much as one would expect. If you pay alimony, you can deduct it, but not voluntary extra alimony payments... The alimony recapture taxation stuff is the only annoyingly complicated section you might look into.

[Jonathan]

It does not, because I'm not paying alimony. I'm just giving her money.

You and your
spouse can designate that otherwise qualifying payments
are not alimony. You do this by including a provision in your
divorce or separation instrument that states the payments
are not deductible as alimony by you and are excludable
from your spouse’s income.

[Jason]

It does not, because I'm not paying alimony. I'm just giving her money.

You and your
spouse can designate that otherwise qualifying payments
are not alimony. You do this by including a provision in your
divorce or separation instrument that states the payments
are not deductible as alimony by you and are excludable
from your spouse’s income.

Dude, you are too nice. If I ever start a company, I know who to start it with. I could take the rug out from under you and you wouldn't even know.
j/k

[Jonathan]

You know what? I think maybe this rule doesn't actually apply to stock grants/RSUs, despite my thread title.

So, I just read up a little on this through my eTrade account's information. You apparently get taxed on the value of the stock you are being granted as it vests at the fair market value on the vesting date. Depending on how your plan works, the tax withholdings are either taken from your paycheck, or taken as a portion of the shares you're granted, or if you sell right away, taken from the proceeds of the sale. Except in that last case, once the taxes are paid, the shares are transferred to you and behave like regular stock as far a future capital gains/losses are concerned.

It seems I conflated the withholding for RSUs with qualified dispositions for ESPP. A man at my office says I should not have treated my qualified disposition of ESPP shares as a purchase of stock at a cost basis calculated from the discounted price. Instead, I should use a cost basis calculated from the FMV on the date of sale and count the discount as regular income.

This is confusing to me, though. I thought the whole point of a qualified disposition was that I did not have to count the discount as regular income.

[Jonathan]

Yeah, I fucked this up.

Wage income from selling SPP stock that does not come from a disqualifying disposition is not reported on your W-2, and you must separately report the income on your tax return (line 21 of Form 1040).

Intel does not report the wage income from ESPP sale on my W-2 due to a disqualifying disposition, but it is wage income and not capital gains income. I guess I need to amend my return.

[quantus]

It's weird that Intel doesn't report the income from disqualifying dispositions on your W-2. Anyways, next year (FY2011), you'll get a separate form 3922 detailing everything due to a new IRS rule. Also, for ISOs, you'd get a form 3921.

Disqualifying dispositions suck because it is mostly "wage" income. With qualifying dispositions, your coworker is correct. The cost basis is just the non-discounted price of the stock you purchased. This happens to be the same as the FMV on the day of the purchase only if the price was trending downward, so your coworker may not be totally correct in what he said. You still need to report the 15% discount as income.

Yeah, hurry up and amend your taxes, but be prepared for the IRS to try to automatically issue you a punitive penalty on top of the interest penalties for the mess up. I've heard of people having a heck of a time trying to appeal the penalty assessment. They're not really supposed to issue a punitive penalty since you're the one who caught the mistake and you obviously weren't trying to actively cheat the government by trying to fix it.

This reminds me, I really need to look over the return my accountant prepared. I'm paying a good chunk less in taxes than I originally estimated and need to see why...

[Jonathan]

It's weird that Intel doesn't report the income from disqualifying dispositions on your W-2.

I meant to say qualifying dispositions. They report disqualifying as long as they're sold in the same year as the purchase.

[Jonathan]

How did you find an accountant?