ESPP and Tax Considerations

[phantom]

2016 is going to be an unusually high income year for me. Barring any major surprises, my husband and I will be in the 28% tax bracket in 2016 and back in the 25% tax bracket in 2017.

I recently started a job with a new employer that offers an employee stock purchase program. I can set aside up to $4600 between May and October to purchase company stock at a 15% discount off of the lower of the May 1 or October 31 price. I can then choose to sell the stock almost immediately. There's a chance the stock could be worth less than what I paid before I can sell, but it's pretty low. So, I decided to participate.

Now I'm considering playing it a little riskier in hopes of some additional tax savings. If I sell my stock at the beginning of November, it'll be taxed at 28%. If I hold the stock until January, it would be taxed at 25%. If I hold the stock till November 2017, it's taxed at the long term capital gains rate of 15%. But, obviously, holding the stock for any length of time introduces the risk that I'll lose money. Assuming very little movement in stock price, we're talking about $1500, $1300, or $800 in taxes. Part of me says that that's a significant potential savings. But, the cautious part of me says the value of the stock could drop by more than the tax savings.

This year's tax situation is what got me thinking about this in the first place. But, at the moment, I'm leaning towards consistently waiting a year to sell so that I get taxed at the capital gains rate.

I don't have any pressing need for the money. I'd be sad if I lost a large chunk of it, but I wouldn't be in financial trouble. Depending on where we are with financial goals when it finally lands in my pocket, it will most likely go towards either replacing my car or paying down my mortgage.

How would you think about the situation, and what would you decide to do?

[TexasHusker]

The decision to sell an asset should be based solely on your comfort level with that holding that asset going forward, not according to any potential tax consequence.

Allowing tax consequences to drive your investment decisions - even a little bit - is a train wreck waiting to happen.

Invest your money, take your profits, pay your taxes (whatever they are), and move on.

[sv2007]

What I'd do should not be what you'd do; there's not just tax but other finances involved (e.g. will I even care much if I lose the whole amount? No. Will you?) I always sell my ESPP immediately because I have a lot of stock options or RSUs in the company already.

I'll also share an experience with you. Wife left a company and had $1m in options; she planned for tax and watched that $1m disappear. We were short-term greedy, we want to pay less tax and hoped for higher price because, you know, it was at higher price just a little while ago. That experience has caused me to act certain way; and it worked out ok for the past many years. Imagine you've suffered thru it; it may cahnge you too (except you don't have to miss any real money).

[LivingAlmostLarge]

You need to read about ESPP. To get long term gains you have to hold it for 2 years in many cases. You get the 15% discount as income and the gains above it have to be held longer than normal. It's in the prospectus. Do not trust any accountant, many don't have a clue. You have to read the fine print of how it's sold whether it's sold quarterly or 2x/year and how they set the anchor price. We had talked to accountants who had no idea how to manage ESPP properly.

DH's old company anchored every 2 years and so the holding period was 2 years. It's complicated. So just holding it 1 year might not be enough. But the 15% discount you get is immediately taxed as income and can appear on w-2.

[phantom]

You need to read about ESPP. To get long term gains you have to hold it for 2 years in many cases. You get the 15% discount as income and the gains above it have to be held longer than normal. It's in the prospectus. Do not trust any accountant, many don't have a clue. You have to read the fine print of how it's sold whether it's sold quarterly or 2x/year and how they set the anchor price. We had talked to accountants who had no idea how to manage ESPP properly.

DH's old company anchored every 2 years and so the holding period was 2 years. It's complicated. So just holding it 1 year might not be enough. But the 15% discount you get is immediately taxed as income and can appear on w-2.

Thanks for suggesting reading the prospectus! I looked through it when I first signed up for the program, but I hadn't thought to go back through it once I started thinking about tax consequences. The holding period is 2 years from the start of the offering period. (The first offering period is May 2016-October 2016.) So, if I want to hold till the end of the holding period, I have to hold till May 2018, which is a year and a half past when I can first sell. Reading the difference between selling during the holding period and after the holding period is making my head swim right now. I am going to have to read it carefully later. But, it definitely seems like the difference in taxes is smaller than I was initially thinking.

Thanks to TexasHusker and sv2007 for your insight as well! I appreciate your perspectives and the words of caution.

[corn18]

I sell my ESPP and RSU's the same day they show up in my account. I don't like having all that money tied up in one stock. Diversification in the form of index funds keeps me sane because I never have to second guess when to buy or sell. I just keep buying. When someone says "I wish I had bought Yahoo @ $XXX" I tell them that I did. And Apple. And Yahoo. They're all in my index funds.