Finance Questions

Archive for the ‘US Federal Finance’ Category

How are Non-Qualified Tax-Deferred Equity Participation Plan (TDEPP) benefits taxed?

An account is established for each employee participating in the plan. In general, the employee does not become vested in the plan for a few years and the units do not convert to the company stock for a longer period of time such as five years, at which point the stock is delivered to the employee.
An employee is not taxed on the portion of the bonus deferred into the plan at the time the deferral is made. Taxes are due when the account balance is vested and when the account balance is converted. When the account balance becomes vested, the employee must pay social security taxes (if he or she has not yet surpassed the Social Security wage base in earnings, which for 2005 is $90,000 and $87,900 for 2004), Medicare taxes and federal unemployment taxes on the then current fair market value of his or her account balance.
Employees will be notified when their account balance is vested, and the taxes will be deducted from their paychecks following vesting. Later, when the account is converted to stock, the employee is taxed on the then current fair market value of the shares he or she receives as ordinary income, not as capital gains.
The employee can choose to either

(1) satisfy the withholding obligation by submitting a check, in which case all shares will be delivered, or
(2) the employee can choose to have the company withhold an equivalent number of shares and receive net shares. The employee's tax basis in the shares received is the fair market value of the shares as of the time of conversion
For contributions to plan accounts prior to 1998, account balances are vested after the earlier of an employee's completion of two years of service following the contribution or the employee's death, disability or termination due to downsizing or retirement. An employee's account balance loses its vesting if the employee is terminated from employment for cause.
This is a general overview of the plan. Only the plan document, summary description booklet and award certificate provide a full explanation of the plan's terms and conditions. The plan differs from company to company.

How do mutual fund shareholders determine the amount of income that is from state tax-exempt government securities?

The exempt portion of the income distribution is equal to the percentage of mutual fund assets invested in qualifying securities (See Question 1 above for a listing of securities). 
In New York, California and Connecticut, a tax exemption for government income earned from a mutual fund is only available to shareholders if at least 50% of the assets of the fund at the end of each quarter of the fund's fiscal year were invested in government securities that are considered tax exempt under state law. 

What is the state income tax treatment for interest accrual on "stripped" government securities?

Interest from "stripped" bonds does not necessarily have the same tax character for state income tax purposes, as would be the case if the bonds were held directly. 
CA, NY, and NJ allow interest from "stripped securities" to be state income tax-exempt, but not all states follow that rule. 
Interest accrual is taxable on a yearly basis at the federal level.