Wanna pay 11% Income Tax on $1,000,000? Just get part of your salary in stock.

[TheBlackAdder]

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My neighbor, used to be an Engineering supervisor for a well despised defense contractor known for not paying taxes, until he retired. He told me something the other day, as we were outside thatkind of pisses me off. We got into politics, and they are middle of the road folks, who vote split ticket. I guess that's a good thing, based on his prior life and work experiences and earlier conservative leanings.

He said that he was paid a portion of his salary in stock and given bonuses in company stock, as well.



Now, I'm probably not going to do this justice, but it will lay down the gist of what he said:


He contacted the payroll department to see what he has to do, as he is in his second year of retirement. They told him that he needs to convert the stock into his 401K plan, and this must be done by the second year--meaning he has to do it this year. They told him there was a certain way to convert the money, which had to be done as a one-time shot, and when doing so, he would only incur an 11% tax hit. I forget the terms he used. He asked if that was correct, and they told him that is what all of the other executives do.

He called his accountant and a friend of his called theirs. Neither one heard of the accounts had this, but after looking into it, they said it appears legitimate.

He told me that this is a tax maneuver that the wealthier executives use, especially those who are just paid in stock and claim to not collect a salary.


I have not heard of this either, but it sure explains why so many executives are eager to be compensated in stock.

Now, if you work for a company and can squirrel away $5,000 a year as stock, in 20 years you've got a mil.

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[Igel]

1. Many execs like to be paid in stock

because many years ago it was decided by Congress that overpaying executives was immoral. So they started having penalties for salaries over a certain amount.

Now, humans being what they are, when they want to do something and find a wall in their way, they find a way around the wall. Ideally, they find a legal way around it, but we don't seem to much care about legality at times, either saying that what somebody we don't like is doing is legal or saying that what somebody we do like is illegal.

One way that executives found around this restriction on executive pay was to pay out compensation in stock options. "We'll pay you $500,000 in stock options, but since it's not cash and you don't own the stock yet, there's nothing to tax."

Another was to defer compensation--"We commit to paying you $500k not this year, when you're making $900k already, but in the two years after you retire." Think of it as a retirement plan.

A third was to pay in stock, which was handled under different regulations by the IRS.

Of course, Congress went back and altered the rules to try to say "this is what we think is fair" and people continue to find (legal) ways around the rules.

So I'm probably going to get a chunk of money from my mother's estate and because of the way it was set up that's almost certainly going to be taxed rather steeply. I'm looking into ways to reduce that tax. This is called "tax avoidance" and it's why I have my health insurance paid pre-tax. It's why I have my kid's college fund in a tax-deferred account. It's why I put money in a traditional IRA and not a Roth IRA. It's why I claim the child tax credit, and why I even bother to claim personal and standard deductions--without those, which are entirely voluntary, I'd pay more taxes. And, like you, I don't want to pay more taxes than I need to. We like to avoid taxes. If you question that, think about *not* claiming various deductions on your 1040, or even better, pay an additional 10% of your income next April as a contribution against the national debt. Yeah, it's a principle that we should pay taxes, but that's a "we" that doesn't include you and me. Just them.

However, that makes me and you just like the executives who don't want to pay more taxes than required by law.