Keeping Up With The Bulls

A personal finance blog focused on making more money, saving money and smart spending.

Save money and increase your wealth by taking advantage of corporate benefits. Typical corporate benefits include 401(k), ESPP, health insurance & more.

The Ultimate Guide To Employee Stock Purchase Plan (ESPP)

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Why You Should Enroll in an employee stock purchase plan

Why do you care about Employee Stock Purchase Plans (ESPP)? If you enroll in the employee stock purchase plan offered by your company you can make more money! ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.5% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

If you’re considering enrolling in ESPP here are the terms you should know, the benefits of ESPP and approximately how much extra income you may be able to make.

Employee Stock Purchase Plan Terms To Know

  • ESPP Enrollment Period: defined set of dates where you can sign up to participate and select the % election amount. If you miss this enrollment period you will have to wait for the next enrollment period (either 6 months or 1 year later depending on the terms)
  • ESPP Purchase Period: Timeframe in which company shares are purchased on your behalf through payroll deductions. There may be two purchase periods a year, one beginning Jan 1st  and ending on June 30th, with the second starting July 1st and ending Dec 31st. You do not have access to the money you’ve contributed during this time.
  • ESPP Purchase Price: Usually, the purchase price is the price of the stock on the last day of the offering period, with the discounted rate applied. In the example above, it would be the ending stock price on June 30th and December 31st.
  • ESPP Holding Period: You can sell your ESPP shares at any time, even the same day you get the shares. However, in order for the sale to be taxed as a capital gain it must be considered a qualifying disposition.
  • ESPP Qualifying Disposition: A qualifying disposition refers to a sale, transfer or exchange of stock that qualifies for favorable tax treatment. ESPP falls within this definition. To be a qualifying disposition, the employee must sell their position at least one year after exercising the stock or two years after the beginning of the ESPP offering period. As long as you hold your ESPP shares for this time period you are taxed at a capital gains rate. If you sell prior to this period, it is considered a disqualifying disposition. A disqualifying disposition is taxed at the income tax rate.

Employee Stock Purchase Plan IRS Limits

The IRS imposes a limit of a maximum market value of $25,000 per year. However, companies can decide to impose lower limits. That means if your company grants you shares at a 15% discount, the max you can contribute is $21,250. The purchase discount also tops out at 15%, but your company could choose to offer less than that as well. Every plan can vary so be sure to look into the details around what plan your company offers.

Employee Stock Purchase Plan Tax Rules

The stock discount price (up to 15%) is considered additional compensation and taxed as ordinary income. If you sell that day, it is disqualifying and will be taxed as a short term gain / ordinary income. If you hold shares for at least 2 years from the first day of the offering period and at least one year from the purchase date, the additional income is considered a “qualifying dispositioned” and will be taxed as a long-term capital gain (15% tax rate for most taxpayers).

Additional Income Earned with Employee Stock Purchase Plan

The tables below offer a guide to how much additional income you can make after taxes if you sell that day per year. If you decide to hold onto the stock for the time period outlined below, your taxes will be 15% (for most taxpayers) for the discounted amount + any gains you made while holding the stock. Remember, it is always possible for the stock to lose value.

Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for single tax filers
*1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket
Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for married filing jointly tax filers
*1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket

It’s hardest to maximize the program when you make less money, but that’s when this is actually the most valuable! When your tax rate is only 22%, you could make almost $2,500 after taxes. If you’re in the highest tax bracket you make only $2,000 after taxes. The first purchase period is always the toughest. You’re used to getting that money in your paychecks every pay period. After the first purchase period is done, if you sell all your shares immediately you have everything you’ve invested from the past 6 months plus the additional income you made as soon as the sale settles!

If you work for a public company, check out your internal benefits page and see if this is one of the benefits your company offers!

See Also: Company 401(k) Match and Why You Should Max Out Your 401(k)

Quadruple The Impact Of Your Charity Donations

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Charity donations: Sign encouraging to donate to charity- be kind, have grace, give thanks, speak love and stay swaggy

It’s nearing the end of the year, which is the perfect time to donate to charity. Because of the tax changes starting in 2017 most taxpayers won’t be able to claim a deduction when donating to charity. This is because the standard deduction nearly doubled. When you filed your 2017 taxes you would have seen for the first time how the tax law impacted your taxes. Just because the financial incentive to donate to charity is gone doesn’t mean you should stop your donations! There are many incentives to donate to charity like knowing the impact you’re making in a cause that’s important to you.

How can you stretch your charity donation to go even further? Luckily, there are two ways to help your favorite charities more without you personally spending any extra.

  1. Donate during the charity donation match period
  2. Leverage your company’s charity donation match when you donate

Do both, and you’ll quadruple the impact of your donation!

Donating to Charity Statistics

The share of Americans who gave money to charity fell from about 68.5% in 2002 to 53.1% in 2016 according to the University of Michigan/IUPUI Lilly School of Philanthropy Panel Study. Additionally approximately 63 million Americans volunteered their time to make a difference according to Nonprofits Source.

The Urban-Brookings Tax Policy Center estimates that the recent tax cuts will shrink the number of households claiming an itemized deduction when they donate to charity from about 37 million to about 16 million in 2018. They estimate that overall, the tax cuts will reduce the marginal tax benefit of giving to charity by more than 30 percent in 2018, raising the after-tax cost of donating by about 7 percent. Unless people increase the amount of money they donate, charities will receive fewer donations and will bear the most of these changes.

Charity Donations Match Period

Many charities have a time of the year where generous donors offer to match all donations. For example, the Greater Chicago Food Bank tends to have this period every year leading up to the holidays. For every $25 you donate, Greater Chicago Food Bank will receive $50. This breaks down to $25 from you, and $25 from the donor that is matching donations. Giving Tuesday is the Tuesday after Thanksgiving in the United States. This day in particular likely has donors offering to match donations. Sometimes donors offer to match donations up to a certain amount and others offer to unlock a donation once donations hit a certain amount that day.

Company Charity Donation Match

Some companies also offer to match donations to your charity of choice, up to a certain amount. The company I work for is one of these companies. They make this entire process really easy, with a company portal that has almost all charities listed. I have yet to find a charity I want to donate to that isn’t in this portal. In the portal we select the charity, how much to donate and then confirm the company match. We receive a confirmation of our charity donation. This can then be used to deduct charity donations on our taxes.

If you work for a company that offers a company match and you donate during this time period your charity offers donation matches that charity will now receive quadruple the amount of money you donated. For every $25 you donate, the charity now receives $100. You’re able to quadruple your impact without having to quadruple your spending.

What Charities Should You Donate to?

Don’t know which charity to donate to? Do a little due diligence before you make a charity donation. Not every charity makes the best use of your donations. Certain charities spend more on administration than others for example. Luckily, there are resources to help guide you. Consumer Reports has a list of best and worst charities that will help you determine which charities should receive your donations.