Tax tips Featured

12:02pm EDT March 17, 2004
As April 15 approaches, financial planners offer advice to executives for saving money on taxes. Every situation is different, but experts suggest these six areas are worth a closer look.


* Converting ordinary income to capital gains


* Assessing deferred compensation plans


* Examining stock options


* Benchmarking compensation and benefits


* Reviewing disability insurance options


* Considering contributing directors' fees to retirement accounts


Convert ordinary income to capital gains. Do this through a section 83(b) election. This section of the tax code imposes ordinary income tax on property, such as restricted stock received as compensation for services, as soon as the property becomes vested and transferable.

Once qualified, it is possible to elect to recognize immediately as income the value of the property received (fair market value minus any amount paid toward the property) and convert all future appreciation to capital gains income. It's wise to consult a tax adviser before making an election of this type.


Assess deferred compensation plans. Based on current cash flow needs, determine whether any company-offered deferred compensation plans would be advantageous.

Before deciding, assess the investment alternatives inside the plan, the credit risk of the plan and the distribution options available.


Remember, stock options come in different forms. Nonqualified stock options (NQSOs), for example, are flexible, but trigger ordinary income tax on any appreciation realized upon exercising the options.

There is also potential liability for capital gains tax on appreciation from a later sale of the stock. Incentive stock options (ISOs) must be retained for at least a specific required holding period, but once that requirement is satisfied, future appreciation above the exercise price is taxed at capital gains rates rather than the higher ordinary income rates.

The tax is payable only upon sale of the stock. When exercising ISOs, report income for the Alternative Minimum Tax calculation. A tax adviser can provide information on the rules and limitations for NQSOs and ISOs.


Consider benchmarking compensation and benefits with those of competing companies. Periodically review compensation, benefits and perquisites of competitors to ensure that employment packages of key employees remain competitive.


Review disability insurance options. If someone pays a disability insurance premium, any disability benefits paid will not be taxable.

This means less coverage is needed than would be necessary under a policy in which the employer pays premiums.


Consider contributing directors' fees to retirement accounts. Compensation earned for serving on a company's board of directors may enable a contribution to a tax-deferred self-employed retirement account for which a current income tax deduction is received for the amount contributed.


Other ideas include making pretax gifts to parents or grandparents if they are at a low level of income and making gifts to children or grandchildren to encourage IRA contributions.

Faye T. Pantazelos is president and CEO of New Century Bank and its parent company, NCB Holdings Inc. She founded NCB Holdings, which provides corporate banking services, in 1997. Reach her at (312) 944-5400 or