It’s that time of the year again.
By midnight on Monday, all 2001 income tax returns — or extensions to file said returns — should be in the hands of the IRS or the U.S. postal service. While the witching hour is only days away, tax experts say it’s not too late for chief financial officers, and other senior level executives, to make some shrewd moves.
Brent Lipschultz, senior manager, personal financial planning, in KPMG LLP’s New York office, offers five tax strategies for senior-level executives:
Opt for Deemed Capital Gains Election
If you have large losses in your stock portfolio for 2001, consider making the one-time deemed capital gains election to offset these losses without actually selling stock (Note: This option applies to stock purchases or other assets acquired in 2001). Benefits are two-fold. First, the special election steps-up the cost-basis for the securities. Moreover, if the securities are held for five years, the election will result in a 2 percent reduction in the normal capital gains tax (18 percent instead of 20 percent).
The Internal Revenue Service treats the elected securities as if they were sold at the stock’s closing market price on January 2, 2001 for “readily tradable stock” and as if they were then reacquired on the same day (Jan. 2) for the same amount or that day’s market price. Although individuals must pay tax on any gain from this deemed sale in 2001, the shares will then have a new holding period. Hence, any future gain is eligible for the 18 percent tax rate in 2006.
“You’re stepping up the stock to whatever is the fair market value on January 2 using gain recognition to offset the losses in your portfolio for 2001,” Lipschultz explains. He does caution, however, that a filer does need to make sure he/she still owns the securities as of January 2, 2002, a year after the deemed sale.
For more information on this special election, visit the IRS Web site, click here.
Transfer Stock Options to Family
Executives may want to consider transferring stock options (Note: only non-qualified qualify) to family members — if their company plan allows for such a transfer. Any combination of estate planning vehicles can be put to use for the purpose: family trusts, family limited partnerships, and grantor retained annuity trusts.
“You’re hoping that appreciation of the underlying stock increases so the value would pass to the family members,” Lipschultz says. “I like this move because when the trustee exercises the stock options, it’s not the trustee that pays the tax, [rather] it’s the grantor or the employee whose options it was.” With a stock option transfer to a family member, he adds, “the employee is not deemed to make a gift and of the income tax that he paid on the exercise of the stock option by the trustee this results in additional estate tax savings.”