“That’s exactly what it is, a mystery!” exclaimed Mikaela. She was referring to the 83(b) filing which can be confusing.
Mikaela and I were discussing the merits of this puzzling selection and what it really means for her. You often hear about it, the “election” and how you can save on taxes. Sometimes, it may not be worth it all.
The 83(b) filing is perplexing and pretentious. It has it all – numbers, a letter, even parentheses.
I like to baptize it as a choice to “pay taxes now, or pay taxes later.”
How the 83(b) Filing Works
When you make this choice you are telling the IRS that you want to pay taxes on the company restricted stock or unvested options now rather than pay taxes during the vesting year for the stock or the year of exercise for the options.
This can be very useful and economical when the tax implications are very low and you believe in the future upside of the stock.
Going one step further, when you join the company let’s say your restricted stock is worth $0.83 per share, and in the future it will be worth $830 per share.
What amount would you rather pay taxes on?
But wait – you must make this decision within 30 days of receiving the restricted stock or within 30 days of options exercise.
Unfair! Confusing!
That’s right. When the stock is worth $0.83 per share, you must decide within 30 days to pay the tax now or wait until later. You won’t know what the shares will be worth in the future. The range can be as high as $830 per share or it could be zero.
If you choose to “pay taxes later” (and not use the 83(b)) when the shares are $830 per share you have a much higher tax bill.
Belief and strong conviction in the company are required to take advantage of this strategy.
Mikaela really believes in her company, and she chose to pay taxes now and took full advantage of the 83(b)!
How to Put Your Choice in Motion
When choosing to “pay taxes now” with an 83(b) filing, you have to notify the IRS of your choice. Do this by writing a letter and sending an 83(b) election form to the IRS with good ol’ fashioned mail.
Here are the snail mail addresses on where to send your letter depending on your state of residence.
Most likely, your company stock provider has the 83(b) filing form and they can share it with you. Make sure your mailing is within 30 days and get proof that it was sent (a tracking number) especially if someone else is doing it on your behalf (Carta).
Remember, when it comes to taxes, especially a choice like this, it’s best to work with a qualified tax professional (CPA).
If you’d like to chat more about this challenging and important decision, I’m here for you.