Now that Elon Musk has taken Twitter private, what happens to public stock and employee stock options? While the November 8th deadline will close the chapter on Twitter as a public company, questions remain.
Twitter stock will close to public trading on November 8th at a price of $54.20/sh and be delisted from the stock exchange. While the deal will still take several months to finalize, employees have more questions than answers in the near term. In most private deals, it is customary that restricted stock units (RSUs) will be settled in cash for the November vesting period. Company executives have indicated that employees should expect the same for Twitter. Future vestings could also be settled in cash at the current stock price or could be converted to cash bonuses using some other metric.
From a tax perspective, cash awards function in a similar way to RSUs, at least in terms of the initial impact on your taxable income. Both types of compensation are taxed (and withheld) at a flat 22% for Federal income tax purposes regardless of your employee withholding elections. However, instead of owning a net amount of Twitter shares you’ll likely end up with a cash payout going forward. It is still important to review your tax situation to see if you will have a tax shortfall at year end. When analyzing your expected taxes, you’ll want to pay special attention to your marginal tax bracket. Your marginal tax bracket is equal to the tax on the next dollar of income that you earn. For many Twitter employees with a significant amount of stock compensation, your marginal rate could be much higher than the required 22% withholding. If so, be on the lookout for a hefty tax bill come next April.
What planning can be done now to prepare?
First of all, you’ll want to determine if estimated taxes are due on your stock payout. The IRS can provide some assistance here, but to be honest, their calculator leaves a lot to be desired (https://www.irs.gov/individuals/tax-withholding-estimator). The IRS allows you to use one of two methods as a “safe harbor” so you can be safe from underpayment penalties and interest. The first method is paying in at least 110% of your prior year tax liability. OR you can pay in 90% of your expected current year tax. Pick the lowest of the two methods and meet the requirements, and you should be free from penalties.
Once you’ve determined the minimum amount of tax to be paid in, consider methods to reduce your tax liability.
Consider additional contributions to the company HSA plan. If you are in a high deductible health plan, you can contribute to the company’s Health Savings Account (HSA). Even though you’ve already set your contribution through payroll, you can still make after tax contributions to the plan up until the tax return deadline of April 15th. Even though the contribution is made from after tax funds, you can take a deduction on your return to reduce your tax bill. HSAs not only reduce your tax bill, but the money can grow tax free for years. HSA money can stay in the account through retirement and you can use the funds to pay for medical costs in future years.
Also, consider contributing more to your company 401(k) plan. A pretax contribution to your retirement account can reduce taxable income and is a great way to save for your future. You may be able to contribute up to 75% of your paycheck or more through the end of the year to max out your contribution up to the $20,500 annual IRS limit.
If you’ve sold some of your RSU shares earlier in the year, or have gains when your shares are converted to cash when the deal closes, look to your other taxable investments and see if you have losses that can be “harvested” to offset your capital gains. There are rules to follow here to make sure you don’t run afoul of the IRS wash sale rules. Speak to your investment professional for assistance on this.
And if you’re hoping for a shiny new Tesla $7,500 tax credit, be aware that the rules have changed with IRS Public Law 117-169 https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit. After August 17, 2022, the vehicle will need to be primarily assembled in the US to qualify. In addition, some vehicles (like Teslas) have already met their manufacturer sales cap and no longer qualify for the incentive tax credit. The rules change again in 2023. While the manufacturer caps go away, there will be a new income limitation in effect that will phase many clients out. If you’re considering a new auto purchase, be sure to review the rules or speak to your CPA to make sure you can bank on the tax credit.
Now is a great time to think about tax planning as many of these tax saving moves disappear after the end of the year. Contact us today if you would like assistance evaluating your tax situation.