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When my restricted stock vests, how will it be taxed?

May 28, 2013 by J from Thousand Oaks, CA in  |  Flag
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The amount that is taxed on your restricted stock is the difference between the fair market value of the stock on the date the stock becomes fully vested and the price you are able to exercise it for. This amount could be zero and you should check with your company HR department to determine the amount. The difference must be reported as ordinary income. However, if you do not sell the stock at vesting and sell it at a later time, any difference between the sale price and the fair market value on the date of vesting is reported as a capital gain or loss.

Comment   |  Flag   |  May 28, 2013 from Uniontown, OH

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J--the entire value of your restricted stock when it vests is subject to ordinary income tax. Mr. Nobb's answer is incorrect. He must be confusing it with regular stock option vesting.

1 Comment   |  Flag   |  May 28, 2013 from Calabasas Highlands, CA
Alan B. Ungar CFP® MBA

Mr. Bopp not Mr. Nobb as mentioned above. My appologies

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Flag |  May 28, 2013 near Calabasas Highlands, CA

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There is no income reported for restricted stock until the year in which the stock vests. At that time, ordinary income is recognized, and the amount is calculated as follows:

Fair market value of the stock on the vesting date Minus the amount the individual was required to pay for the stock (if any) Equals ordinary income. (FICA and FUTA taxes well)

Later, when the executive sells the stock, a capital gain is recognized. (the fair market value utilized in computing ordinary income tax above becomes your cost basis to compute the future capital gains).

Note there is a distinction between restricted stock and restricted stock units. In the case of units, the value of the stock is included in income on the transfer and vesting date, which are the same date. The income amount is the fair market value of the stock on that date.

Seek a qualified financial advisor and tax professional.

Source GrantThornton, Taxation of stock options and restricted stock: the basics and beyond. By G. Edgar Adkins, Jr.

The above referenced information was obtained from reliable sources, however Lantern Wealth Advisors LLC and Lantern Investments, Inc. cannot guarantee its accuracy. The information presented herein is for presentation purposes only and is not intended to provide personal investment advice. Lantern Wealth Advisors LLC and Lantern Investments, Inc. do not provide tax, accounting or legal advice.

Comment   |  Flag   |  May 30, 2013 from Melville, NY

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Alan is correct. There is no income reported for restricted stock until the year in which the stock vests. At that time, ordinary income is recognized on the fair market value. Later, when you sell your stock, a capital gain (or loss) is recognized.

Comment   |  Flag   |  May 28, 2013 from Fort Worth, TX

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Kudo's to my esteemed colleagues... all good answers. In addition, I might add, that you should consult with your CPA regarding taxation and timing of this event. He may be able to suggest losses you might take to offset the gains generated by this event.

Best Regards, Rod Miller, CFP, CLU, ChFC

View all 5 Comments   |  Flag   |  May 28, 2013 from Springfield, MO
Alan B. Ungar CFP® MBA

Yes that would work. However we generally do not recommend taking an 83b election with restricted stock because the vesting periods are so short and the risk usually is not worth it.

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Flag |  May 28, 2013 near Calabasas Highlands, CA
Rod Miller, CFP®, CLU, ChFC

Again, my initial reply was to consult with a Certified Public Accountant to consider how this event might affect the overall tax planning for the year in which the event occurs. Not giving tax or legal advice here. I always suggest clients seek a "second opinion" when dealing with tax or legal issues.

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Flag |  May 28, 2013 near Springfield, MO

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