Employee Stock Purchase Plan

[SpiceWeasel]

Financial "experts":

Would you - cash out on the purchase date / within 2 years (income tax bracket rate) or would you wait until you would pay capital gains taxes on the difference between the stock price and the employee discounted price?

As far as I can tell, you're subject to being income taxed (at your rate) on the employee discount percentage.

If you wait for the 2 year mark, you will only be capital-gains taxed upon the difference in selling price and share price on the day of the purchase of the stock.

https://communications.fidelity.com/sps/fidelityinvestor/2014/Q1/espp/article.html This article sort of explains what I'm getting at...

Thanks

 

[wheelsup]

It really depends on how you feel about the stock, company, and economy. Paying taxes is NEVER bad, it means you made money. I watched a $50k gain over three weeks go to a $2k gain over 5 months because I didn't want to pay ~30% taxes on that gain. Stupid, stupid, stupid. I knew I should've sold but was thinking about the $15k in taxes I was going to have to pay. I have since learned my lesson, I won't make the same mistake twice...

My personal opinion is any time I'm getting a large gain I sell and capture it UNLESS the stock is still underpriced in my opinion, which generally is not the case. Jetblue, right now, is very fairly priced in terms of its stock price for current conditions IMO (if that is what you are asking about). It's not cheap or expensive.

The flip side to this is my wife was awarded a nice chunk of Intuit stock a couple years ago. We sat on it and it doubled over the span of a couple years. Having worked there, my wife truly believed in the upper level management and direction they were taking the company, she knew the type of people who worked there (well compensated, intelligent employees) and she knew the company treated employees extremely well and motivated them. We just cashed out about a week ago on that stock.

If you have the ability to purchase company stock for a discount and immediately sell it for a profit, my God, I would be all over that in a heartbeat. How much can you buy?

 

[SpiceWeasel]

It really depends on how you feel about the stock, company, and economy. Paying taxes is NEVER bad, it means you made money. I watched a $50k gain over three weeks go to a $2k gain over 5 months because I didn't want to pay ~30% taxes on that gain. Stupid, stupid, stupid. I knew I should've sold but was thinking about the $15k in taxes I was going to have to pay. I have since learned my lesson, I won't make the same mistake twice...

My personal opinion is any time I'm getting a large gain I sell and capture it UNLESS the stock is still underpriced in my opinion, which generally is not the case. Jetblue, right now, is very fairly priced in terms of its stock price for current conditions IMO (if that is what you are asking about). It's not cheap or expensive.

The flip side to this is my wife was awarded a nice chunk of Intuit stock a couple years ago. We sat on it and it doubled over the span of a couple years. Having worked there, my wife truly believed in the upper level management and direction they were taking the company, she knew the type of people who worked there (well compensated, intelligent employees) and she knew the company treated employees extremely well and motivated them. We just cashed out about a week ago on that stock.

If you have the ability to purchase company stock for a discount and immediately sell it for a profit, my God, I would be all over that in a heartbeat. How much can you buy?

Well I dabbled this round ... and I'm continuing the next round. I have 142 shares. I am not sure what the limit is on purchases (I think ours is 10% of our income - but I see that federally $25,000 is a limit), but as I increase in longevity I plan to max out my contribution.

 

[SpiceWeasel]

Additionally...

I deposit some of my income directly into a low-rate interest-bearing savings account. It sucks, but it's a place for the money to go...

As opposed to other holding methods like CDs etc etc, would I be better off (as long as the padding in savings was enough to cover, say, 6 months of emergency funds), putting all of my savings eggs into the employee purchase basket so that I could gain the discount rate profit (minus taxes)?

Seems to me like this is a no-brainer... but I'm just not sure.

 

[wheelsup]

Don't even look at the taxes because you only pay taxes if you MAKE MONEY. You will never pay more in taxes than you make on that sale so who cares what rate you pay?

I don't know the specifics of how employee stock purchase plans work. Any time my wife received stock it had a vesting period (RSOs). If you are saying you can buy stock today for a 10% discount and sell it the same day or the next day you are looking at a 10% gain on that stock for one days worth of work. I dunno, sounds stupid to turn down an easy $2,500. It's too bad it's limited to just $25,000!!

 

[SpiceWeasel]

Don't even look at the taxes because you only pay taxes if you MAKE MONEY. You will never pay more in taxes than you make on that sale so who cares what rate you pay?

I don't know the specifics of how employee stock purchase plans work. Any time my wife received stock it had a vesting period (RSOs). If you are saying you can buy stock today for a 10% discount and sell it the same day or the next day you are looking at a 10% gain on that stock for one days worth of work. I dunno, sounds stupid to turn down an easy $2,500. It's too bad it's limited to just $25,000!!

The reason it even came up is because of the 2 year holding period to get capital gains taxed versus my effective tax rate based on my yearly income. My 2014 effective rate was 12%, 2015 is 15%, and I can only imagine it climbing from there (it's nice to have that problem I guess!). So, capital gains is 15%, versus what I might be paying, say, at 10 years longevity. Food for thought.

 

[wheelsup]

The reason it even came up is because of the 2 year holding period to get capital gains taxed versus my effective tax rate based on my yearly income. My 2014 effective rate was 12%, 2015 is 15%, and I can only imagine it climbing from there (it's nice to have that problem I guess!). So, capital gains is 15%, versus what I might be paying, say, at 10 years longevity. Food for thought.

Well your 'effective' rate is a moot point, the tax rate on the short term gains are taxed at your marginal rate which for most major pilots is going to be at least 25% with spouse income pushing up into the 30's. Selling your stock within the time period for short term capital gains is just like picking up another trip in open time at the end of the year.

Essentially what you're betting is buying the stock now for $x and holding on to it and selling it for $x+y later. Refer to my comments above about the company & management to determine if you want to take that bet.

My point is that, in almost all cases, a 10% instant, guaranteed gain in ONE DAY beats a xxx% possible gain after 10 years, with a caveat about the company above. It's free money.

JetBlue is a strong company from an outsiders viewpoint. Great metrics, great culture, management, you name it. I wouldn't roast someone for taking the bet of the company value increasing over time. That being said my personal rule is never invest long term in airlines. Anything could happen. It's such a crap shoot. For anything long term my personal opinion is an index ETF or similar with low expense ratio that captures the entire market. It won't ever beat the market but it won't ever under perform either.

Not counting appreciation this is what you are looking at:
$2,500 gain @ one day holding period assumes 25% marginal rate = $1875 net
$2,500 gain @ 730 day holding period @ 15% long term rate = $2125 net

A difference of $250(!). You're making a bet the stock will appreciate over those two years hoping to save just $250. It really could pay off or you could lose your shirt, the 52 week range for jetBlue is $16-$26.

 

[SpiceWeasel]

Thank you very much, @wheelsup . This advice is very helpful!

 

[hammerhat]

Don't even look at the taxes because you only pay taxes if you MAKE MONEY. You will never pay more in taxes than you make on that sale so who cares what rate you pay?

This is generally incorrect and may be an example of why Internet is not the best place for tax or legal advice.

There are number of scenarios when equity compensation results in tax liability even if no gain is realized. Couple examples:

1. Exercising ISO (Incentive Stock Options) may trigger AMT (Alternative Minimum Tax) liability even if the stock is worthless. In other words, not only you don't make any money, in fact you PAY money to exercise the options. On top of that you get a tax bill.

2. Non-qualified stock options may be even worse, because in addition to the exercise price you pay the regular income tax on the difference between the exercise price and fair market value. At this point not only you haven't made a penny but you've paid for the privilege to keep the stock. And if the stock later grows and you end up selling it for profit then you would also pay the capital gains tax, but at that time at least you'd have made some money.

Here's some stories of how employees can get screwed:
http://www.nytimes.com/2015/12/27/t...start-up-stumbles-its-employees-get-hurt.html

 

[SpiceWeasel]

This is generally incorrect and may be an example of why Internet is not the best place for tax or legal advice.

There are number of scenarios when equity compensation results in tax liability even if no gain is realized. Couple examples:

1. Exercising ISO (Incentive Stock Options) may trigger AMT (Alternative Minimum Tax) liability even if the stock is worthless. In other words, not only you don't make any money, in fact you PAY money to exercise the options. On top of that you get a tax bill.

2. Non-qualified stock options may be even worse, because in addition to the exercise price you pay the regular income tax on the difference between the exercise price and fair market value. At this point not only you haven't made a penny but you've paid for the privilege to keep the stock. And if the stock later grows and you end up selling it for profit then you would also pay the capital gains tax, but at that time at least you'd have made some money.

Here's some stories of how employees can get screwed:
http://www.nytimes.com/2015/12/27/t...start-up-stumbles-its-employees-get-hurt.html

https://communications.fidelity.com/sps/fidelityinvestor/2014/Q1/espp/article.html

Of course a NYT article is probably as reliable as advice on the Internet

The fidelity article I'm linking was the basis for my decision because it is bonafide financial information from a large institution. They broke it down into simple terms. I don't see how you would trigger AMT... what's the threshold for that anyway? I'm in my 3rd year at a "major" and may clear $70,000 this year and so far the stock is another $300 (since it's an after tax withholding from my pay that's the "15% profit").

If you read the article from Fidelity you will understand better - I think you are wrong for trusting a news article.

 

[drunkenbeagle]

The fidelity article I'm linking was the basis for my decision because it is bonafide financial information from a large institution. They broke it down into simple terms. I don't see how you would trigger AMT... what's the threshold for that anyway? I'm in my 3rd year at a "major" and may clear $70,000 this year and so far the stock is another $300 (since it's an after tax withholding from my pay that's the "15% profit").

You are supposed to figure out what you would owe under AMT, and what you would owe normally, and pay AMT if it is more. Generally will come into play only if you have a lot of deductions - kids, mortgage, and certain types of stock options. When I worked for dot coms and was paid mostly in stock, I always owed it.

My advice is to take the profit now. Yes, you may pay slightly less in taxes. Either because the stock goes down and you didn't make a profit, or because you got the long term capital gains rate. You are probably talking about a difference of at most 10% of the profit - it isn't huge. The odds of the stock losing 10% in a year or two are likely about 50/50.

How much profit are you talking about though? It probably isn't much, and the taxes you would pay probably aren't all that much more.

The question to ask yourself is this. If I had a pile of money right now, would I use it to buy this stock, or would I invest it someplace else. As we are talking about airline stocks, the answer is always - better to invest it someplace else. Like an IRA. Where you get a tax deduction for putting it there anyway.

 

[wheelsup]

This is generally incorrect and may be an example of why Internet is not the best place for tax or legal advice.

There are number of scenarios when equity compensation results in tax liability even if no gain is realized. Couple examples:

1. Exercising ISO (Incentive Stock Options) may trigger AMT (Alternative Minimum Tax) liability even if the stock is worthless. In other words, not only you don't make any money, in fact you PAY money to exercise the options. On top of that you get a tax bill.

2. Non-qualified stock options may be even worse, because in addition to the exercise price you pay the regular income tax on the difference between the exercise price and fair market value. At this point not only you haven't made a penny but you've paid for the privilege to keep the stock. And if the stock later grows and you end up selling it for profit then you would also pay the capital gains tax, but at that time at least you'd have made some money.

Here's some stories of how employees can get screwed:
http://www.nytimes.com/2015/12/27/t...start-up-stumbles-its-employees-get-hurt.html

Re-read the OP's questions again. He's not getting any sort of equity compensation, he's purchasing the stock for a 10% discount with the ability to sell it right away, or hang on to it.

I thought about mentioning the AMT but from his past posts and lower tax rate felt he probably wasn't anywhere close to touching it that a $2,500 gain would put him over the edge, it was a gamble to take I just didn't want to cloud the issue.

I'm familiar with the options you speak of - my wife had some - she let them expire and never exercised them precisely for the reason you cited. As to the post you quoted, everything needs to be taken in context (this thread). As they say, "ATFQ".

 

[hammerhat]

Of course a NYT article is probably as reliable as advice on the Internet

I'm speaking from my prior experience as an accountant. I'm not going to give any financial advice to anyone on the internet or IRL for obvious reasons.

Re-read the OP's questions again. He's not getting any sort of equity compensation

Sure I'm not familiar with OP's financial situation and my above post does not address his question directly.

I'm just saying that a statement like "you only pay taxes if you MAKE MONEY" is 1) generally incorrect, and 2) may end up being extremely expensive to someone else (with potentially a different financial situation) who reads it here.

 

[SpiceWeasel]

You are supposed to figure out what you would owe under AMT, and what you would owe normally, and pay AMT if it is more. Generally will come into play only if you have a lot of deductions - kids, mortgage, and certain types of stock options. When I worked for dot coms and was paid mostly in stock, I always owed it.

My advice is to take the profit now. Yes, you may pay slightly less in taxes. Either because the stock goes down and you didn't make a profit, or because you got the long term capital gains rate. You are probably talking about a difference of at most 10% of the profit - it isn't huge. The odds of the stock losing 10% in a year or two are likely about 50/50.

How much profit are you talking about though? It probably isn't much, and the taxes you would pay probably aren't all that much more.

The question to ask yourself is this. If I had a pile of money right now, would I use it to buy this stock, or would I invest it someplace else. As we are talking about airline stocks, the answer is always - better to invest it someplace else. Like an IRA. Where you get a tax deduction for putting it there anyway.

Or.... my accountant figures out whether I owe AMT!

So far that bug hasn't bitten me yet. I'm pleasantly surprised to learn that Richard Kiyosaki is wrong (was told at a seminar that AMT is always owed if you hit it once).

The profit I'm talking about is 15% give or take a few points depending on what it sells for (obviously I'm not going to sell it below the cost, if I can help it - good 'til canceled selling price at or above 15%).

So, according to Fidelity, I would owe income tax on the 15% discount and capital gains/loss tax on the actual price I sell it for.

 

[wheelsup]

I'm speaking from my prior experience as an accountant. I'm not going to give any financial advice to anyone on the internet or IRL for obvious reasons.



Sure I'm not familiar with OP's financial situation and my above post does not address his question directly.

I'm just saying that a statement like "you only pay taxes if you MAKE MONEY" is 1) generally incorrect, and 2) may end up being extremely expensive to someone else (with potentially a different financial situation) who reads it here.

OK, if they take my response to someone else's question without asking their own specific question that is on them. Putting a 20 page disclaimer at the end of my posts would be a waste of everyone's time, especially mine. Let it go.

The OP wanted to pay the long term cap gains tax on his holdings and my response was completely correct for his situation. Either he can hold and risk losing $$, or he can sell immediately for the short term gains which is the same as his marginal tax rate. There was no incorrect info in my post. I was attempting to point out the fallacy of wanting to save a couple bucks in taxes (possibly) for the immediate large gain but paying more in taxes. The reality is the $250 he'll pay in extra taxes is insignificant in the big scheme of things.

 

[drunkenbeagle]

So, according to Fidelity, I would owe income tax on the 15% discount and capital gains/loss tax on the actual price I sell it for.

Most likely, yes. You are probably talking about a taxable profit of less than $500 here, so you are probably talking about the difference between paying $90 or $150 in taxes. I would just cash out and keep doing the same thing. Risking $2,500 to save $60 in taxes seems crazy to me.

 

[higney85]

The 10% discount is nice compared to buying in the open market, especially if you aren't being charged commissions and are buying a little at a time over a long period of time. That being said, I have never seen the math to make buying the stock in an employee plan just to make a quick buck. Between commissions to sell and tax implications, it's not a short term thing. Employee discounts allow you to purchase X amount per paycheck/quarter/year without commissions to build up equity and it's viewed as a perk. If you are dumping in 25k a year into company stock, it would be my hope that you are putting far more overall into overall investments yearly so you aren't overweight in company stock. Everyone has heard of Enron, 2009 with failed banks, etc... plus it's the airline industry.. All that being said, it can be a good way to build an equity commission in your company with a discount and low fees. That's the perk in a nutshell.

Obviously, this is advice from a fellow pilot... so it's more of an opinion.