When and How much tax due on NUA?

Submitted by David Solomon on Tue, 2013-04-02 16:23

I have a Client who Retired from Pacar after 30 years. When we met him, he had some Employer Stock in his 401K. We told him about NUA. I have questions about when and how much tax he owes. Below is the history:

We Opened up a Fidelity Instutional Brokerage Acct and IRA Acct March 2012. We called the Pacar 401K Custodian (Fidelty) and directed them to Transfer the Company Stock to the Brokerage Acct and the rest to the IRA. They did that March 26, 2012. The main question is on the NUA tax in the Brokerage Acct. Fidelty Pacar 401K told us that the Cost Basis on the Pacar Stock was $107,262.10. 8070 Shares were transfered to the Brokerage Acct on March 26, 2012. The Closing Price of the Stock on that day was $47.53 (don’t know if that matters), for a total of $383,567. It is my understanding that the Client owes tax on the Cost Basis ($107,262.10) at his Ordinary Income Tax Rate (in this case 25% or $26,815.50 for 2012, the year of the Distribution. Is this Correct? This is what we told the Client last year about this time. To add to this, the Client, in expectation of this tax due by April 15, 2013, Sold 600 Shares of his Pacar Stock in the same Brokerage Account December 26, 2012 to “cover the tax due” from the transaction. 600 X $44.65 = $26,785. What is the tax owed on this? Is it 15% Long-term Capital Gains?
The Client’s CPA is asking me about the “Cost Per Share”. Why does he need this? Do I need to divide the number of share, 8070 at the time the Client did the NUA (March 26, 2012) by the Cost Basis ($107,262.10)? If we do that it is $13.29 per share. Do we need to factor in the cost per share anywhere?

I haven’t read anything on factoring in the Cost Per Share anywhere. It was my understanding that the Client pays Ordinary Income tax on the Cost Basis of the Stock the year it is rolled out to the Brokerage Acct and because the Cost Basis is treated as a Distribution. And going forward, any stock sold going forward is treated as Long-term Capital Gains (currently 15%). Right! Did the Client need to hold the stock in the Brokerage Acct for One Year before he sold some share to recieve the Long-term Capial Gains Tax rate?

Thanks for anyone who can give me a straight, accurate answer.

Dave S.
Wenatchee, WA



Submitted by Alan - IRA critic on Tue, 2013-04-02 18:11

  • The 1099R should include the NUA amount in Box 6 and the cost basis in 2a. There would be a separate 1099R for the IRA rollover. Using the numbers you posted the cost basis per share is 13.29 and the 107,262 would be taxable at his ordinary marginal rate in 2012. There is no 10% penalty if he either separated at 55 or later or took the LSD at age 59.5.
  • Since he sold the 600 shares at less than 47.53 per share, his cost basis is 13.29 and his LT cap gain on the NUA is 18,816  (600 sh X (44.65 less 13.29)). This is why the CPA needs the FMV upon distribution and this can be confirmed from the 1099R. THe 2012 LT cap gain rate is 15% max.
  • Client immediately gets the LT rate up to the NUA per share. If he had sold for more than 47.53 per share, the amount in excess of 47.53 would have been taxed at the ST rate since he did not hold the shares over a year after the date of the LSD. Since a year has now passed, all future gains would be taxed at the LT rate.
  • NOTE: Check if client had any non NUA basis in these shares from any after tax contributions he made to the plan. The affect of that would be a reduced taxable amount in Box 2a of the 1099R due to a basis recovery. This can get confusing because plan basis is totally different than NUA cost basis per share. If the 1099R does not reflect the numbers you posted, then that needs to be resolved.

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