by Bruce Brumberg from the myStockOptions.com Blog
Among all of its provisions that took effect on January 1, the American Taxpayer Relief Act does not have any that directly relate to stock compensation—though, of course, increases in the rates on income tax, capital gains, and dividends indirectly affect the value of equity awards. The following changes in tax rates under the new legislation apply to income from stock option exercises, restricted stock and RSU vesting, ESPP purchases, sales of stock, and dividends. (See FAQs at myStockOptions.com that show the taxes and withholding rates for various types of equity awards.)
- The top federal withholding rate on supplemental income rose to 39.6%. Supplemental income, such as stock compensation, is subject to one of two flat rates that are linked to income tax rates. For aggregate supplemental wage payments totaling up to $1 million during the year, the rate is 25% (the rate of the third income tax bracket). For aggregate supplemental wage payments that exceed the level of $1 million in a calendar year, the rate is now 39.6% (the new rate of the highest income tax bracket).
- The Social Security rate returned to 6.2% after a temporary cut to 4.2% in 2011 and 2012, as the new tax law did not extend the reduction in payroll tax. Social Security tax applies up to a certain amount of yearly income ($113,700 in 2013) and not to yearly income above that threshold.
- The capital gains tax rate that applies to the proceeds from a stock sale increased to 20% for single filers with annual income of more than $400,000 and for married joint filers with annual income of more than $450,000. (For taxpayers whose annual income is below these thresholds, the top rate of capital gains tax remains 15%.)
- Similarly, the tax rate on dividends grew to 20% for single filers whose annual income is over $400,000 and for married joint filers whose annual income is over $450,000. This applies to any qualified dividends received on company stock you own or on unvested restricted stock for which you have filed a Section 83(b) election.
- For people with incentive stock options, the income exemption amounts (commonly known as the “AMT patch”) for calculating the alternative minimum tax in 2013 are $50,600 for single filers and $78,750 for married joint filers. Additionally, the new tax law indexed the annual AMT income exemption amounts permanently for inflation. The new tax legislation did not extend the refundable AMT credit that was available for the tax years 2007 through 2012.
- Separately from the American Taxpayer Relief Act, in 2012 the Affordable Care Act increased the Medicare tax rate on compensation income for high-income taxpayers from 1.45% to 2.35%, and a new 3.8% Medicare surtax now applies to investment income, such as capital gains from stock sales. Both of these tax changes became effective on January 1, 2013.