Four Ways Tax Reform Affects Stock CompensationThe Tax Cuts and Jobs Act was adopted in December 2017 and has provisions that directly and indirectly affect equity compensation.

The core tax treatment of equity compensation has not changed. Below are the provisions that affect its individual taxation. (Unless they are extended, the tax rates and AMT changes end after 2025, reverting to 2017 rates.)

1. Changes in the rates of individual income tax. The Tax Cuts and Jobs Act keeps the current seven tax brackets, reducing the rates and changing the income thresholds that apply. The new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, with the top bracket starting at $600,000 for joint filers ($500,000 for single filers).

The flat supplemental rate of federal income tax withholding on equity compensation is based on the seven brackets. For amounts up to $1 million, the third-lowest rate, 22%, will apply. Amounts over $1 million are linked to the highest rate (37%). The applied withholding may not cover the actual taxes you will owe, so you need to know the tax bracket for your total income and assess the need to put money aside or pay estimated taxes.

2. Changes in the calculation of the alternative minimum tax (AMT). The income spread at incentive stock options (ISOs) exercise can trigger the AMT, which warrants complex tax planning. While the AMT (and how it applies to ISOs) is not repealed, below are the new numbers in the AMT calculation (to be adjusted annually for inflation):

• The 2018 AMT income exemption amount rises to $70,300 (from $54,300) for single filers and to $109,400 (from $84,500) for married joint filers.

• The income where this AMT income exemption starts to phase out in 2018 is substantially adjusted upward to begin at $500,000 for individuals (from $120,700) and $1,000,000 (from $160,900) for married joint filers.

These higher AMT income exemption amounts, and the much higher income point where the phaseout starts, make it much less likely that ISOs will trigger the AMT.

3. A version of the Empowering Employees Through Stock Ownership Act is part of the final legislation. This provision lets an employee in a privately held company elect to defer taxes at option exercise or RSU vesting for up to five years as long as the company’s equity awards meet certain conditions.

2017

Tax laws are complex and subject to change. State and local taxes also may apply, and the rules governing such taxes may vary from federal income tax rules. Your actual income tax consequences depend on your individual circumstances. Therefore, you should always consult a qualified tax advisor regarding your particular tax situation.

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4. No change in the capital gains rates (15% and 20%). A reduction in ordinary income rates may lower the difference between your income tax rate and your capital gains rate. This reduced differential might affect your tax-planning decisions, e.g. whether to hold shares at exercise, vesting, or purchase. While there is no change in capital gains rates, the tax law creates a new income threshold for when the rate on long-term capital gains and qualified dividends goes from 15% to 20% ($479,000 for married joint filers and $425,800 for single taxpayers). This threshold is no longer similar to that of the top income tax bracket.