What to Know About Restricted Stock Awards and Taxes

What-to-Know-About-Restricted-Stock-Awards-and-Taxes

Restricted stock awards are a popular way for companies to offer equity-oriented executive compensation. Some businesses offer them instead of stock option awards. The reason: Options can lose most or all their value if the price of the underlying stock takes a dive. But with restricted stock, if the stock price goes down, your company can issue you additional restricted shares to make up the difference. Here, we’ve outlined the essentials of what to know about restricted stock awards and taxes.

Restricted Stock Basics

In a typical restricted stock deal, you receive company stock subject to one or more restrictions. The most common restriction is that you must continue working for the company until a certain date. If you leave before then, you forfeit the restricted shares, which are usually issued at minimal or no cost to you.

To be clear, the restricted shares are transferred to you, but you don’t actually own them without any restrictions until they become vested.

Tax Rules for Share Awards

So, what are the tax implications? You don’t have any taxable income from a restricted share award until the shares become vested — meaning when your ownership is no longer restricted. At that time, you’re deemed to receive taxable compensation income equal to the difference between the value of the shares on the vesting date and the amount you paid for them, if anything. The current federal income tax rate on compensation income can be as high as 37 percent, and you’ll probably owe an additional 3.8 percent net investment income tax (NIIT). You may owe state income tax, too.

Any appreciation after the shares vest is treated as capital gain. So, if you hold the stock for more than one year after the vesting date, you’ll have a lower-taxed, long-term capital gain on any post-vesting-date appreciation. The current maximum federal rate on long-term capital gains is 20 percent, but you may also owe the 3.8 percent NIIT and possibly state income tax.

Special Election to Be Currently Taxed

If you make a special Section 83(b) election, you’ll be taxed at the time you receive your restricted stock award instead of later when the restricted shares vest. The income amount equals the difference between the value of the shares at the time of the restricted stock award and the amount you pay for them, if anything. The income is treated as compensation subject to federal income tax, federal employment taxes, and state income tax, if applicable.

The benefit of making the election is that any subsequent appreciation in the value of the stock is treated as lower-taxed, long-term capital gain if you hold the stock for more than one year. Also, making the election can provide insurance against higher tax rates that might be in place when your restricted shares become vested.

The downside of making the election is that you recognize taxable income in the year you receive the restricted stock award, even though the shares may later be forfeited or decline in value. If you forfeit the shares back to your employer, you can claim a capital loss for the amount you paid for the shares, if anything.

If you opt to make the election, you must notify the IRS either before the restricted stock is transferred to you or within 30 days after that date. We can help you with election details.

Your Important Decision

The rules are fairly straightforward regarding what to know about restricted stock awards and taxes. The major tax planning consideration is deciding whether to make the Section 83(b) election. The trusted team at Ramsay & Associates is here to help. Consult with us before making that choice.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Claiming Casualty Loss Tax Deductions

Claiming-Casualty-Loss-Tax-Deductions

This year, many Americans have been victimized by wildfires, severe storms, flooding, tornadoes, and other disasters. No matter where you live, unexpected disasters may cause damage to your home or personal property. But claiming a deduction has gotten more complicated. Keep reading to learn the rules for claiming casualty loss tax deductions.

Defining Casualty

What’s considered a casualty for tax purposes? A “casualty” is a sudden, unexpected, or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism, or a terrorist attack.

Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But currently, there are restrictions that make these deductions harder to take.

The Rules and Exception

For losses incurred from 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Claim a Refund with a Special Election

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can potentially help you get extra cash when you need it.

This election must be made no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating the Casualty Loss Deduction

You must take the following three steps to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:

  1. Subtract any insurance proceeds.
  2. Subtract $100 per casualty event.
  3. Combine the results from the first two steps and then subtract 10 percent of your adjusted gross income (AGI) for the year you claim the loss deduction.

Important: Another factor that makes it harder to claim a casualty loss than it was years ago is that you must itemize deductions to claim one. Through 2025, fewer people will itemize because the TCJA significantly increased the standard deduction amounts. For 2023, they’re $13,850 for single filers, $20,800 for heads of households, and $27,700 for married joint-filing couples. So, even if you qualify for a casualty deduction, you might not get any tax benefit because you don’t have enough itemized deductions.

Lawmakers Debating the Issue

Earlier this year, a bipartisan group of lawmakers in Washington introduced a bill that would make the deduction available to more taxpayers. The proposed Casualty Loss Deduction Restoration Act would reinstate the deduction to all taxpayers with a casualty loss — not just those located in a federal disaster declaration area. Passage of the bill is uncertain at this time.

We Can Help

When it comes to claiming casualty loss tax deductions, the rules described here are for personal property. Keep in mind that the rules for business or income-producing property are different and other rules may apply. As it happens, it’s easier to get a deduction for a business property casualty loss. If you’re a victim of a disaster, contact us. The knowledgeable team at Ramsay & Associates can help you understand the complex tax deduction rules.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.