This Tax Move Could Save You $30k+ on Equity Compensation

Do you earn equity in your company as part of your comp package?

Well listen up!

Today we’re going to be talking about one of the most powerful equity comp tax saving strategies available…but it only works for certain situations. 

It’s called the 83(b) election.

In this week’s edition, I’ll break down what an 83(b) election is, why it matters, how it works, and what pitfalls to watch out for. Think of it as a cheat sheet to help you keep more of your hard-earned money where it belongs: in your pocket.

What Is an 83(b) Election?

An 83(b) election is a tax move you can make when you receive restricted stock as part of your compensation. When you file an 83(b) election, you’re telling the IRS: “Hey, tax me on this stock now, even though it’s not fully mine yet.”

Why would anyone want to pay taxes earlier? Good question! It’s all about locking in a lower tax rate now instead of potentially paying a much higher rate later.

Here’s where the magic happens:

• Without an 83(b) election, you’ll pay taxes on the value of your stock as it vests. If your company’s stock skyrockets in value, you’ll be taxed on the higher amount at your ordinary income tax rate (ouch!).

• With an 83(b) election, you pay taxes on the stock’s value when it’s granted—likely much lower. Then, any future gains are taxed as capital gains, which typically have a lower tax rate.

Let’s break it down with an example.

Imagine your company grants you 10,000 shares of restricted stock valued at $1 per share today. These shares will vest over four years. By year four, the stock’s value has jumped to $20 per share.

• No 83(b):

  • Year 1: No tax yet.

  • Year 4: Shares vest, and the IRS taxes you on $200,000 (10,000 shares x $20/share). This is taxed at your ordinary income rate, which for high earners like you could be 37%.

  • Tax bill: $74,000.

• With 83(b):

  • Year 1: You file the 83(b) election and pay tax on $10,000 (10,000 shares x $1/share).

  • Tax bill: $3,700 (assuming a 37% rate).

  • Year 4: Any additional value is taxed at the lower capital gains rate (let’s say 20%).

  • Total tax savings: $32,300!

What Kind of Equity Qualifies for an 83(b) Election?

You can make an 83(b) election when you receive restricted stock or other forms of equity subject to vesting. (Think restricted stock awards (RSAs), not restricted stock units (RSUs)) 

Stock options (like NSOs or ISOs) don’t qualify unless you exercise them early and they’re subject to vesting afterward.

How to Make an 83(b) Election

Filing an 83(b) election is easy if you act fast. Here are the steps:

1. Fill Out the 83(b) Form: You can find it on the IRS website.

2. Mail It to the IRS: Send your form within 30 days of receiving the restricted stock. No exceptions.

3. Keep a Copy: Make sure to keep a copy for your records and send one to your employer.

4. Consult a Pro: Always work with a tax advisor to make sure everything’s in order.

Some Things to Keep in Mind

Although this is a powerful tool, there are still some things to consider before pulling the trigger.

• Know Your Goals: If you’re planning to leave the company soon, an 83(b) might not make sense.

• Think Long-Term: The benefits of an 83(b) election are best when your company’s stock has strong growth potential.

• Do NOT Miss the Deadline: You only have 30 days to file. If you miss it, there’s no do-over.

• Cash Flow Crunch: You’ll need to pay taxes upfront, so make sure you have the funds.

Conclusion: Your Equity, Your Rules

The 83(b) election is like a secret weapon for high-earning pros who want to maximize their equity and minimize their taxes. But timing and strategy are everything. When used wisely, it’s a powerful way to keep more of your hard-earned money.

So, next time your employer offers you equity, don’t just nod and smile. Think about the 83(b). Your future self (and your wallet) will thank you.

Need help figuring out if the 83(b) election is right for you? Let’s chat. I’ll help you make the smart moves to save big and grow your wealth.

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Whenever you’re ready, here are a couple of ways in which I can help you save money on your taxes:

1. Book a free Strategy Call: Provide me with some financial information before the call and in 45 min to an hour I’ll give you every strategy, tactic, tool, and adjustment I’d make to your financial life to help you pay thousands less in taxes and build wealth faster.

2. Book me as a Keynote Speak: In my talks I share the practical strategies, principles, and rules anyone can adopt to save them thousands of dollars a year on taxes and build wealth more quickly.  

3. ​Start working together: Feel like you've read enough and are ready to get some help implementing the things we talk about here in this newsletter? Respond to this email letting me know and we can talk about next steps.