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Employee Stock Purchase Plan 04.21.2021

What is an Employee Stock Purchase Plan?

Employee Stock Purchase Plan | If you are an employee of a publicly traded company, it most likely offers an employee stock purchase plan, or ESPP for short (also sometimes called a section 423 plan). These are excellent plans to take advantage of, as they allow employees to purchase company stock at a discount. However, what most people do not fully understand are the tax consequences of selling the stock.

With an ESPP, an employee is not taxed at the time they purchase shares, but instead only when they sell. As you may expect, the tax consequences of the sale will be different, depending specifically on how long the employee has held the shares. This holding period will determine if the sale is a “qualifying disposition” or “disqualifying disposition.”

Oftentimes, Employee Stock Purchase Plans allow employees to use after-tax payroll deductions to purchase company stock at a discount, which can be as high as 15% off the actual market price of the stock. However, what most people do not fully understand are the tax consequences of selling the stock acquired through these plans.

Taxation rules of ESPPs

Understanding taxation rules associated with ESPPs means you have an understanding of the importance of a “disposition strategy” that will produce the best economic result for you. With an ESPP, or qualified Section 423 plan, as we’ve said, you are not taxed at the time the shares are purchased, but instead only when you sell.

Employees can generally sell shares at any time, which is great if you have immediate cash needs, or want to reinvest the money into other assets. However, the tax consequences of the sale depend specifically on how long you have held the shares. This holding period will determine if the sale is a “qualifying disposition” or “disqualifying disposition,” which governs how much of the gain will be taxed at capital gains rates, or at less favorable ordinary income rates.

A qualifying disposition occurs when you sell your shares after holding them for at least one year from the purchase date and at least two years from the offering date. The rules say that you will pay ordinary income tax on the lesser of either 1) The discount offered based on the offering date price, or 2) the gain between the actual purchase price and the final sale price. The remainder of the gain, if there is one, will be taxed at the more favorable long-term capital gains rate.

If you don’t meet the holding period requirements for a qualifying disposition, then by default you end up with a disqualifying disposition. You will pay “regular” ordinary income tax on the difference between the actual purchase price and the purchase date market price, and you’ll pay capital gain tax rates on the difference between the purchase date price and the final sales price. It’s a little complicated, we know.

As you can see, it is incredibly important you understand the ESPP tax rules and how they can impact the amount of money you end up keeping in your pocket, if and when you decide to sell any shares you own in your section 423 plan.

Feel free to contact Towerpoint Wealth on LinkedIn, Facebook, or Instagram to discuss a disposition strategy that is best for you given your circumstances and financial goals. What are the taxation rules associated with Employee Stock Purchase Plans—ESPPs—and can you be sure you’re minimizing taxes? It’s important to have a disposition strategy that will produce the best economic result for you.

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Home Office Deduction 04.02.21

Like many workers during the pandemic, you went from a somewhat quiet office to your tiny home “office” where you couldn’t escape your noisy kids and barking dog. With Tax Day pushed back to May 17th, this has given taxpayers extra time to find ways to lower their tax bills. Like most, you may have thought to yourself, “Wait a minute, I worked out of my home office for 9 months last year. Can I claim the home office deduction?”

As you would expect, taxpayers must meet very specific requirements to claim home expenses as an income tax deduction. You must be a certain type of taxpayer, you must determine if the office is really your principal place of business, and only certain expenses qualify for the deduction.

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn whether or not you qualify for the home office deduction, and if you do, how to calculate the deduction. 

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Rental Passive Activity Losses

Do you invest in #rentalrealestate? Are you considering doing so? You have heard about the potential #taxdeductions and benefits, right? Not so fast!

Watch this quick video from our Wealth Advisor, Matt Regan, to learn more about the passive activity loss (PAL) rules associated with owning rental real estate, and message us with any questions that are on your mind.

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Cryptocurrency – Wait, I Have to Pay Taxes??!!

Do you own/trade cryptocurrency? Interested in investing in BitcoinEthereum, or any of the other 4,000 cryptocurrencies currently available to own and trade?

If so, it is important you understand the income tax consequences of owning crypto.

If you are thinking about buying, selling, or trading cryptocurrencies, watch this quick video from our Wealth Advisor, Matt Regan, to learn the tax consequences of doing so.


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Rich vs Wealthy

Would you rather be rich or wealthy? Do you know the difference? The small financial decisions we make today will have a huge impact on our future. Click below and take 60 seconds to watch Matt Regan’s video message!

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Coffee At Home

Investing early and making intelligent incremental monetary decisions usually leads to BIG THINGS, it just takes time and discipline.

Click below and take 60 seconds to watch Matt Regan, CPA, MBT – Wealth Advisor‘s most recent OneMinuteTaxTip video to learn how a simple change in your financial lifestyle, such as making coffee at home, can end up having a huge impact on your longer-term networth and your ability to #retire when you want to!

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Retirement Account Rollovers | One Minute Tax Tips

This week’s One Minute Tax Tip – old 401(k) and retirement account rollovers! Many people have a retirement account held with a previous employer, but oftentimes don’t know what to do with these assets. Watch this quick video to learn more about the four options available to you.

Feel free to email us at info@towerpointwealth.com to discuss your circumstances further.

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“Encouragement” – Your 2021 Financial Goals | One Minute Tax Tips

Instead of a “regular” One Minute Tax Tip, this week our Wealth Advisor, Matt Regan, brings you encouragement. Encouragement to reflect not only on your 2020 financial accomplishments, but also on your 2021 goals.

Feel free to email us at info@towerpointwealth.com to discuss your circumstances further.