by The MDTAXES Network | Oct 14, 2015 | Credit, Taxes
Making an 83(b) election can save taxpayers significant taxes if they purchase or otherwise acquire shares of “restricted” stock in a company that is appreciating in value.? Over time, the restrictions attached to these shares “lapse” and the shares become “vested”.
One common restriction is the ability to sell your shares on the open market.? Non-vest shares generally can only be sold back to the company at the price originally paid for them.?? Shares held long enough for the restrictions to lapse, however, are worth their full fair market value and can be sold at your discretion.
Taking ownership of restricted shares of stock is challenging from a tax planning perspective.??As the shares vest and the restrictions attached to your shares of stock lapse, you are taxed on the fair market value of those shares on the date they vest.
For Example:
Let’s say that you provide valuable consulting services to a start-up company, and they offer you the opportunity to purchase 100,000 shares of their stock at a price of 1 cent per share.? So your cost is $1,000.
The arrangement is that these 100,000 shares are restricted shares that will vest quarterly over 5 years at a rate of 5,000 shares per quarter, as long as your consulting arrangement continues.? If your relationship with the company is severed within 5 years, any shares that haven’t vested can be returned to the company and you will receive the 1 cent per share that you paid.? Meanwhile, you’ll continue to own shares that you held long enough to vest, and can sell them at your discretion.
Let’s also say that the day after you purchase the shares, the value of the company jumps to $10.01 per share, and then remains at that value for the next five years.? In this case, since 5,000 shares vest each quarter, you will need to report $50k of income each quarter, or $200k of income annually, on your personal tax return.? You report this income even though you don’t receive any cash as the shares vest each quarter.
The 83(b) Election to the Rescue:
By making an 83b election, you avoid reporting income each quarter as the restrictions on these shares of stock lapse.? Instead, you only report income once; based on the difference between the value of the shares and what you paid for them on the day that you acquired the restricted shares. You’ll report that income the year the shares are acquired.
To summarize:
- Making an 83(b) election provides for lower capital gains when you actually get the money by selling your vested shares (assuming one year passes from the date of the 83(b) election).
- Not making the 83(b) election means the possibility of getting hit with higher tax rates on phantom income as the shares vest since you don’t receive any money for your shares as they vest.
Caveat Elector:
Please note that the larger the disparity between your cost and the shares’ value, the more expensive it is tax-wise to make the 83(b) election.? The second major pitfall is that if you make the 83(b) election and then your relationship with the company terminates, you don’t get to take a loss on the 83(b) income reported on the unvested shares.
How to Make the Election:
Usually, if you are working with a start-up company, the lawyer or the finance person helping out the company will guide you through making the 83(b) election.
The election needs to be made within 30 days of receiving the shares of restricted stock by submitting the properly completed and signed election statement to the IRS.
The company also needs to send in a copy of the signed 83(b) election, and you will attach a third copy of the 83(b) election to your personal tax return filed for that year.
by The MDTAXES Network | Oct 14, 2015 | Credit, Education, Taxes
Below is information provided by our friends at the IRS:
If you, your spouse or a dependent are heading off to college in the fall, some of your costs may save you money at tax time. Here are some tips on claiming an education-related tax credit on your federal tax return:
- American Opportunity Tax Credit.The?AOTC?is worth up to $2,500 per year for an eligible student. You may claim this credit only for the first four years of higher education. Forty percent of the AOTC is refundable. That means if you are eligible, you can get up to $1,000 of the credit as?a refund, even if you do not owe any taxes.
- Lifetime Learning Credit.The?Lifetime Learning Credit?is worth up to $2,000 on your tax return. There is no limit on the number of years that?you can claim the LLC for an eligible student.
- One credit per student.You can claim?only one type of education credit per student?on your tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For instance, you can claim the AOTC for one student,?and claim the LLC for the other.
- Qualified expenses.You may use?qualified expenses?to figure your credit. These include the costs you pay for tuition, fees and other related expenses for an eligible student.
- Eligible educational institutions.Eligible schools?are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify. If you aren?t sure if your school is eligible:
- Ask your school if it is an eligible educational institution, or
- See if your school is on the U.S. Dept. of Education?s Accreditation database.
- Form 1098-T.?In most cases, you should receive Form?1098-T, Tuition Statement, from your school by Feb. 1, 2016. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be different than the amounts you actually paid. That might happen because some of your related costs may not appear on the form. For instance, the cost of your textbooks may not appear on the form. However, you still may be able to include those costs when you figure your credit. Don?t forget that you can only claim an education credit for the qualified expenses that you paid in that same tax year.
- Nonresident alien.??If you are in the United States on an F-1 Student Visa, the tax rules generally treat you as a nonresident alien for federal tax purposes. ?To find out more about your F-1 Student Visa status, visit?U.S. Immigration Support. To learn more about resident and nonresident alien status and restrictions on claiming the education credits, refer to?Publication 519, U.S. Tax Guide for Aliens.
REMEMBER:?INCOME LIMITS
These credits are subject to income limitations and may be reduced or eliminated, based on your income.
USEFUL RESOURCES:
by The MDTAXES Network | Oct 30, 2014 | Credit
We’ve received quite a few questions about the federal income tax credit available to people who purchase electric cars. The maximum tax credit is currently $7,500, and there appear to be 24 manufacturers who produce electric cars at this time.
The good news is that there is no income limitation for this $7,500 tax credit.? Plus, you can still claim this credit even if you are subject to the dreaded Alternative Minimum Tax.
200K Car Limit
Like with the Hybrid Car Tax Credit, this credit will begin to phase-out on some of the more popular models.?To level the playing field for each manufacturer, the allowable tax credit starts to disappear for a manufacturer once they sell 200,000 plug-in electric vehicles, as follows:
- The full credit is allowed through the end of the quarter following the quarter during which the manufacturer sells its 200,000th plug-in electric vehicle.
- The credit is cut in half for the subsequent two quarters.
- The credit is then cut to a quarter of the original credit for the subsequent two quarters.
- No credit is allowed for vehicles purchased from that manufacturer thereafter.
The phase-out of the Hybrid Vehicle Tax Credit began once a manufacturer sold 60,000 vehicles. The popularity of the Toyota and Lexus hybrids caused the credit for their models to begin to be phased-out almost immediately.?With cumulative sales of the Nissan leaf at 64,782 and the Ford electric cars at 30,374, there is no reason to believe that this credit will be phased-out any time soon for any of the brands.
Here is the IRS list (as of June 2014) of the auto manufacturers who produce electric cars, along with a link that lists the tax credits allowed for each model:
?????? Index to Manufacturers:
If you purchase an electric car, use the?Form 8936?to claim this tax credit as part of your federal tax filing. Please remember to bring your vehicle?s bill of sale to your tax prep meeting this winter.
by The MDTAXES Network | Aug 21, 2014 | Credit, Taxes
We’ve received quite a few questions recently about the federal income tax credit available to people who purchase electric cars. The maximum tax credit is currently $7,500, and there appear to be 24 manufacturers who produce electric cars at this time.
The good news is that there is no income limitation for this $7,500 tax credit.? Plus. you can still claim this credit even if you are subject to the dreaded Alternative Minimum Tax.??According to the IRS, here is a list of the auto manufacturers who produce electric cars, along with a link that lists the tax credits allowed for each of their models:
Index to Manufacturers
(Last Reviewed or Updated: 23-Jun-2014)
200K Car Limit
Like with the Hybrid Car Tax Credit, this credit will begin to phase-out on some of the more popular models.? To level the playing field for each manufacturer, the allowable tax credit starts to disappear for a manufacturer once they sell 200,000 plug-in electric vehicles, as follows:
- The full credit is allowed through the end of the quarter following the quarter during which the manufacturer sells its 200,000th plug-in electric vehicle.
- The credit is cut in half for the subsequent two quarters.
- The credit is then cut to a quarter of the original credit for the subsequent two quarters.
- No credit is allowed for vehicles purchased from that manufacturer thereafter.
As we discussed in a previous post, the phase-out of the Hybrid Vehicle Tax Credit began once a manufacturer sold 60,000 vehicles. The popularity of the Toyota and Lexus hybrids caused the credit for their models to begin to be phased-out almost immediately.?With cumulative sales of the Nissan leaf at 64,782 and the Ford electric cars at 30,374?, there is no reason to believe that this credit will be phased-out any time soon for any of the brands.
Form 8936
If you purchase an electric car, use the?Form 8936, Qualified Pug-in Electric Drive Motor Vehicle Credit?to claim this valuable tax credit as part of your federal tax filing.
