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For Restricted Stock Owners, Now is the Time to Revisit the 83b Election  Thumbnail

For Restricted Stock Owners, Now is the Time to Revisit the 83b Election

If you receive restricted stock as part of your compensation, now be an opportune time to make the 83b election. Ordinarily, income taxes are due when restricted stock vests, usually sometime in the future. However, the 83b election allows you to pay the income tax today within 30 days of the grant date of your restricted stock. You can choose a partial or full election, paying some tax today and some in the future. The downside to the 83b election is if you leave the company before the vesting date. If that occurs, you forfeit the restricted stock and the tax you paid upfront. So why take the chance on the 83b election? One simple reason: Tax rates are low, and likely will go up. 


Figure 1 - Marginal Federal Tax Rates on Labor Income: 1962 to 2028

President Biden has made it clear tax rates are going up. Congressional Democrats are on board too, releasing their proposal to increase taxes. Given the trillions spent on the pandemic, the trillion dollar infrastructure bill, and many of the current favorable tax laws expiring in 2026, odds are we are in the lowest tax rate environment we will see for a very long time. Figure 1, from the Congressional Budget Office, makes it clear the trend is not your friend if you are in the top marginal tax bracket. 

Given the likelihood for higher tax rates in the future, all else being equal, it makes more sense to make the 83b election now on restricted stock and pay the tax at lower rates.  For my clients with restricted stock, we are running projections on the potential tax savings if we make the 83b election. With our planning software, we run simulations to see the impact making the 83b election has at various future income tax rates. The projections help quantify the potential tax savings and can help clients decide whether to make the election. Some clients are hedging their bet and taking a partial 83b election. Those clients are paying the income tax now on only some of their restricted stock, letting the rest be taxed in the future. Those clients may be unsure of their future income and tax rate or unsure if they will remain with the company till vesting. 

There is more to the 83b election and restricted stock planning. Please consult with a qualified tax or financial professional before you decide. For now, given where tax rates could be headed, the 83b election - whether partial or full - is an idea worth exploring. For more, see my Executive Insights blog posts or email me your questions.  

"Given the likelihood for higher tax rates in the future, all else being equal, it makes more sense to make the 83b election now on restricted stock and pay the tax at lower rates."
 


Further reading for Executives: 

How High Earners Can Use a "Mega Backdoor Roth"

Maximize Your 401(k) With These Mutual Funds - Here are my four favorite types of mutual funds to own in a 401(k)

         
                                   
               
             
               
             
               
             
                             
                           
                             


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