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Tax Bites: Executive compensation and expanded Medicare tax

Will your executive compensation be subject to expanded Medicare taxes?

Maybe. The following types of executive compensation could be subject to the health care act’s 0.9% additional Medicare tax:

• Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold

• FMV of restricted stock when it’s awarded if you make a Section 83(b) election

• Bargain element of nonqualified stock options when exercised

• Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture

And the following types of gains will be included in net investment income and could trigger or increase exposure to the act’s new 3.8% Medicare contribution tax:

• Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election

• Gain on the sale of stock from an incentive stock option exercise if you meet the holding requirements

We’d be happy to help you determine the best strategy for your exec comp. With smart timing, you may be able to reduce or avoid exposure to the expanded Medicare tax.

 

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