ESPP taxes

[sosoo]

---

Members do not see this ad.

hi, a number of ppl on this forum are into stocks investing, and so i like some advice. should i sell my holdings after june 30 or wait til after december 30? i search the web the past hour and couldnt come up with a decision. ^_^

offering period: jan 1- june 30, 2012.
purchase date june 30, 2012.
FMV 46.7...... purchase price 35.6.

if i sell after june 30, after one-year from purchase date, how will i be taxed?
if i sell after december 30, after two-years from grant date, how will i be taxed?

from what i gather, i will be taxed long term capital gains either way.
my concern is ordinary income tax.

 

[owlegrad]

I think we have a thread for this? Try running a search. Or just look at the threads on the front page. 😉

 

[pezdispenser]

It is a little bit complicated. See these articles for help:

http://turbotax.intuit.com/tax-tool...s/Employee-Stock-Purchase-Plans/INF12047.html

http://efs.fidelity.com/support/sps/article/article2.html

Part of the gain is taxed as ordinary income, but that amount depends on your holding period and the share prices on the various dates.

 

[farmadiazepine]

So, this is what you want to do (and this is what I am doing). This is the smarter of the 2 options you mentioned, in my opinion.

You want to keep the stock for at least 2 years from the 1st day of the offering period because there is less taxes for you in the end. This is the same as keeping the stock at least 18 months from the date of purchase. Both mean the same thing.

Keep the stock for another 6 months and sell it on or after January 1, 2014 (You will be selling January 2nd actually, because the markets are closed on January 1st).

I bought the max amount of CVS stock through the ESPP in 2012. The first date of the offering period was January 1, 2012. I have the option to sell in a few days, just like you, after June 30, 2013, but I don't want to because I'll wind up paying more in taxes.

I am going to keep it for another 6 months, and then I will sell on or after January 2, 2014. From that point going forward, if you keep buying the stock, you can keep selling off your old shares (that are >2 years old) every 6 months just to make some extra money and not paying more in taxes.

That link that the person provided above is helpful. Here is the most helpful part of it:

"How much of the stock sale price is compensation and how much is capital gain?

That depends on whether your stock sale is a qualifying disposition or a disqualifying disposition.

Both terms are defined below.

Disqualifying Disposition:

You sold the stock within two years after the offering date or one year or less from the exercise (purchase date). In this case, your employer will report the bargain element as compensation on your Form W-2, so you will have to pay taxes on that amount as ordinary income. The bargain element is the difference between the exercise price and the market price on the exercise date. Any additional profit is considered capital gain (short-term or long-term depending on how long you held the shares) and should be reported on Schedule D.

Qualifying Disposition:

You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date). If so, a portion of the profit (the "bargain element") is considered compensation income (taxed at regular rates) on your Form 1040. Any additional profit is considered long-term capital gain (which is be taxed at lower rates than compensation income) and should be reported on Schedule D, Capital Gains and Losses. "

So you want to sell on or after January 2nd, 2014. Just think, always keep the stock an extra 6 months, that's it.

 

[Dr Wario]

Be careful when people are saying you are taxed at a lower rate when doing a qualifying dispensation, this is not the case. In either option you are charged ordinary income rates for the amount of the discount and capital gains rates on the remainder. The difference actually comes into effect when the value of the stock has gone down when you sell to below your actual purchase price.

As an example, say the fair market value of the stock on the purchase date is 30/share and you receive a discount of 15% and thus you pay 25.50/share. You keep the stock for one year from the purchase date, thus you have a disqualifying dispensation, and sell the stock for 20/share. Because you did not retain the stock for long enough, you actually have to pay taxes on the (fair market value of each share on day of purchase) - (actual purchase price) thus 30-25.50 = 4.50 per share that you are required to pay taxes on. In other words, you are paying taxes at ordinary income rates on the amount that you were discounted, even though you did NOT actually realize any of this benefit. Had you kept the stock long enough to be classified as qualifying dispensation, you would not have been taxed on this amount.

If the price of the stock remains at or above your actual purchase price, you actually pay the same amount of taxes in both scenarios, the only difference is how the income is actually reported (w2 vs 1040). As a side not, man CVS ESPP has been so awesome for the 3 years I've been able to use it.

Speaking of taxes, is anyone else as excited as I am for the HSA CVS is offering now? Such an awesome deal if you are in good health but I think it kinda sucks that cvs puts in less money the higher your salary is.

 

[farmadiazepine]

Be careful when people are saying you are taxed at a lower rate when doing a qualifying dispensation, this is not the case. In either option you are charged ordinary income rates for the amount of the discount and capital gains rates on the remainder. The difference actually comes into effect when the value of the stock has gone down when you sell to below your actual purchase price.

As an example, say the fair market value of the stock on the purchase date is 30/share and you receive a discount of 15% and thus you pay 25.50/share. You keep the stock for one year from the purchase date, thus you have a disqualifying dispensation, and sell the stock for 20/share. Because you did not retain the stock for long enough, you actually have to pay taxes on the (fair market value of each share on day of purchase) - (actual purchase price) thus 30-25.50 = 4.50 per share that you are required to pay taxes on. In other words, you are paying taxes at ordinary income rates on the amount that you were discounted, even though you did NOT actually realize any of this benefit. Had you kept the stock long enough to be classified as qualifying dispensation, you would not have been taxed on this amount.

If the price of the stock remains at or above your actual purchase price, you actually pay the same amount of taxes in both scenarios, the only difference is how the income is actually reported (w2 vs 1040). As a side not, man CVS ESPP has been so awesome for the 3 years I've been able to use it.

Speaking of taxes, is anyone else as excited as I am for the HSA CVS is offering now? Such an awesome deal if you are in good health but I think it kinda sucks that cvs puts in less money the higher your salary is.

I did not know this at all. So you're saying whether I keep less than 2 years or more than 2 years, if the price of the stock is higher than the purchase price, we will be paying the same in taxes? The only difference is how it is reported and which form is used, correct?

 

[Dr Wario]

I did not know this at all. So you're saying whether I keep less than 2 years or more than 2 years, if the price of the stock is higher than the purchase price, we will be paying the same in taxes? The only difference is how it is reported and which form is used, correct?

You got it. If you keep the stock for less than two years your employer is required to report the amount of the discount as income on your w2, if you keep it for longer you are required to report the income on the 1040. By the way, in both cases ss and med taxes do not apply as long as your employer has structured the espp properly to comply with exempt status (CVS has done this).

Sorry let me clarify one thing, it actually matters when the stock had a gain if your espp has a lookback rule (meaning you pay the lower of, price during the first day of offer period or last day of the offer period). Due to the fact that a qualifying disposition considers (sale price - market price on first day of offer period) as the amount of cap gains tax, if the stock price rises significantly during the offer period, you will have a slight tax advantage to hold for the two years because the gains during the offer period will be treated as cap gains instead of ordinary income.

This difference, in reality, is actually quite small unless the gain during the six month offer period is massive. As an example, say you purchase $5,000 of stock for an offer period of six months and the stock rises 5% during that time so you have a gain of $250. Well in a disqualifying disposition you would pay ordinary income rate on this 250 so lets say 30% thus you pay 75 in taxes, had you held the stock for two years to make a qualifying dispostion, you would pay long-term cap gains rate of 15% on the 250 so you pay 37.50, thus you end up saving a whooping $37.50 in taxes.

 

[sosoo]

thanks all. i think i will sell now instead of waiting b/c the tax benefits i dont think is comparable to the 6.8% interest rate on my student loan. the interests accrued daily and end up to be a very significant amount in six months, more so than the tax benefits from waiting.

 

[BMBiology]

essp tax calculator: http://twtitw.firebus.com/node/270

 

[Aznfarmerboi]

Be careful when people are saying you are taxed at a lower rate when doing a qualifying dispensation, this is not the case. In either option you are charged ordinary income rates for the amount of the discount and capital gains rates on the remainder. The difference actually comes into effect when the value of the stock has gone down when you sell to below your actual purchase price.

As an example, say the fair market value of the stock on the purchase date is 30/share and you receive a discount of 15% and thus you pay 25.50/share. You keep the stock for one year from the purchase date, thus you have a disqualifying dispensation, and sell the stock for 20/share. Because you did not retain the stock for long enough, you actually have to pay taxes on the (fair market value of each share on day of purchase) - (actual purchase price) thus 30-25.50 = 4.50 per share that you are required to pay taxes on. In other words, you are paying taxes at ordinary income rates on the amount that you were discounted, even though you did NOT actually realize any of this benefit. Had you kept the stock long enough to be classified as qualifying dispensation, you would not have been taxed on this amount.

If the price of the stock remains at or above your actual purchase price, you actually pay the same amount of taxes in both scenarios, the only difference is how the income is actually reported (w2 vs 1040). As a side not, man CVS ESPP has been so awesome for the 3 years I've been able to use it.

Speaking of taxes, is anyone else as excited as I am for the HSA CVS is offering now? Such an awesome deal if you are in good health but I think it kinda sucks that cvs puts in less money the higher your salary is.

I never put money into the ESPP. I thought there was no way it could beat the interest on my student loans. Now that I am almost done with my student loans, do you think it is still a good investment at 60 dollars? I remember the day when it crashed 10 dollars because Caremark lost a few clients.

 

[rickyroxy]

Be careful when people are saying you are taxed at a lower rate when doing a qualifying dispensation, this is not the case. In either option you are charged ordinary income rates for the amount of the discount and capital gains rates on the remainder. The difference actually comes into effect when the value of the stock has gone down when you sell to below your actual purchase price.

As an example, say the fair market value of the stock on the purchase date is 30/share and you receive a discount of 15% and thus you pay 25.50/share. You keep the stock for one year from the purchase date, thus you have a disqualifying dispensation, and sell the stock for 20/share. Because you did not retain the stock for long enough, you actually have to pay taxes on the (fair market value of each share on day of purchase) - (actual purchase price) thus 30-25.50 = 4.50 per share that you are required to pay taxes on. In other words, you are paying taxes at ordinary income rates on the amount that you were discounted, even though you did NOT actually realize any of this benefit. Had you kept the stock long enough to be classified as qualifying dispensation, you would not have been taxed on this amount.

If the price of the stock remains at or above your actual purchase price, you actually pay the same amount of taxes in both scenarios, the only difference is how the income is actually reported (w2 vs 1040). As a side not, man CVS ESPP has been so awesome for the 3 years I've been able to use it.

Speaking of taxes, is anyone else as excited as I am for the HSA CVS is offering now? Such an awesome deal if you are in good health but I think it kinda sucks that cvs puts in less money the higher your salary is.

I really like the new HSA account. I was able to put all $6500 (family plan) for 2013 tax year within six month time. It sucks though if you are buying non-generic non-preventative medication, then you pay 100% price. Also the $4000 family deductible is not individualized like previous year where $2000 for me and $ 2000 for wife.

Also as far as ESPP, do you guys plan to keep it for long term or cash out as soon as its qualified to sell? I do not have any student loan and for now planning to keep it until I need it.

 

[pezdispenser]

Also as far as ESPP, do you guys plan to keep it for long term or cash out as soon as its qualified to sell? I do not have any student loan and for now planning to keep it until I need it.

I just cash out and 'recycle' the money into more stock. My main intention is to pocket the discount which is a few thousand dollar return for a pretty low risk. Any additional profit is the icing on the cake, but I believe people at both chains have made tens of thousands of dollars over the past few years from their ESPP 😉

 

[Dr Wario]

I never put money into the ESPP. I thought there was no way it could beat the interest on my student loans. Now that I am almost done with my student loans, do you think it is still a good investment at 60 dollars? I remember the day when it crashed 10 dollars because Caremark lost a few clients.

The question of weather the CVS ESPP is still a good deal now that the market price is around 61/share is a difficult one. I am continuing to max my contributions because I have a 15% downside protection on the investment plus about 2% for the yearly dividend. I still find the fundamentals of the company generally good, barring some major circumstance, I believe we can expect the stock to stay relatively flat or have slight increases over the next few years. So in conclusion, I still think it is a good deal, just not quite as good as it has been for the last 4-5 years.

 

[farmadiazepine]

i just cashed out 450 shares, made a $11,700 profit. the share prices were SO LOW when i got them. i only held onto them for the required 18 months.

i will still continue to put money into the CVS ESPP, and i put the max i can 15%, and keep selling every 6 months just to pocket that small 17.6 percent return every 6 months. i'll continue to do this as long as the price of the stock stays relatively flat at least.

i also put the max into the hsa this year. for someone who is young and healthy, high deductible plans are awesome. i never have to use my coverage unless its a real emergency. plus i save up plenty of money that can be used if i really need it.

 

[pezdispenser]

WAG doing very well right now at over $54. I bought some for around $40.50 in June and the holding period is only 90 days, so that's a nice 35% gain, not even annualized.