Broker Check

Monday Money Report

| April 19, 2021

Earnings season has kicked off and the market continues to reach new highs.  Unemployment has fallen to 6%, down from a pandemic peak of 14.8%.  Total people claiming unemployment benefits has fallen over the last week by 1.3 million, down to 16.9 million claimants.  Retail spending in March, lifted by stimulus checks, was up 9.8%.

Last week we discussed stock options, which are the right to buy stock a set price sometime in the future. Many local employers, including Booz Allen, Comcast, Home Depot, and Amazon, also offer stock grants.  These can take two forms, and it is important to know the difference.

Both forms work the same.  An employee is usually awarded stock grants based on individual and/or company performance.  Like options, these typically have a vesting period. Unlike options, you don’t purchase the stock when it vests.  When the stock grant vests, you will be taxed on the current value of the shares.  It is considered ordinary income. Usually at vesting, you will sell enough stock to cover the withholding due on the income generated by the grants.

If you have RSUs, or Restricted Stock Units, you don’t have any options around when or how the income is recognized. If you have Restricted Stock, you may be able to make an 83(b) election. Within 30 days of receiving the grant, you can choose to recognize the income in the current year.  The income is the current share price times the number of shares granted.

Why would you do this? You don’t have the option to sell the stock to cover the taxes due, so you will have to come up with those tax dollars.  On the other hand, when the granted shares vest, the difference in price between when you made the 83(b) election and when you sell the stock is treated as long-term capital gains, which are taxed at a lower rate than ordinary income. Sounds like a pretty good deal – by recognizing the grants as income when awarded, you pay lower taxes overall. 

The possible downsides are that the stock may be lower in value when it vests than when you made the 83(b) election.  So you paid ordinary income taxes for a higher amount than necessary. Sure, you’ll get a capital loss if you sell it at a loss, but that isn’t going to offset the ordinary income tax you paid.  Also, if you leave the company before the grant vests, you lose the stock – and you’ve already paid the taxes on the income.  The 83(b) election can make a lot of sense and reduce taxes if things work out. Consider carefully both your career plans and your company’s trajectory before making the election.

Your action to take this week is to have your jewelry, art, and antiques appraised.  If you have the personal article floater we discussed, you want proof of the value of these items. It’s also a good idea to walk through your home with your cell phone and narrate your possessions as you film them.  The ashes of your Ethan Allen sofa look very similar to the ashes of an Ikea sofa.

Our calendar of free educational events is on our website at covingtonalsina.com.  And for the month of April, we’re donating $5 for everyone new who likes our Facebook page to the All Children’s Chorus of Annapolis, up to $500.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.