Many people associate taxes with a single date: April 15. However, in reality, tax planning should be a part of your financial life throughout the year.

For example, tax planning can and should be incorporated into investment decisions, charitable giving, and business planning. And in some cases, taxpayers face decisions well before April that can have a big impact when they eventually file their returns. For example, those who receive property, such as distributions of stock from employers, may face the issue of making an 83(b) election. But before taking advantage of this tax planning technique, they must know what it is and what is available to them, and they must act quickly on that information.

To understand what an 83(b) election is, let’s start with a review of a related part of the tax code. Section 83(a) of the Internal Revenue Code governs the taxation of property transferred to an employee in exchange for services. For example, if you work for a new company and receive company stock as part of your compensation, Section 83(a) says that income represented by the fair market value of those shares does not have to be included in your taxable income until you know you will keep it (eg when it vests) or the shares will become transferable (ie you could sell or give them away). The rule says that property is taxed from the first time it is transferable or not subject to a substantial risk of forfeiture, whichever comes first.

But what if you wanted to speed up the process for tax purposes? Section 83(b) allows you to do so without waiting for the trigger provisions of the above rule. If the person receiving the property elects to include its fair market value in gross income in the tax year in which the transfer is made, the taxable amount will be the fair market value of the shares at the time of transfer, less what was paid for the property, at any rate. Making an 83(b) election circumvents the Section 83(a) rule for the property in question. However, there is risk involved. If you lose or seize the property because it was subject to restrictions at the time you paid taxes, you cannot take a deduction for the amount you already included in election income or for the taxes you paid as a result. If he later sells the property, he must also pay capital gains tax on any appreciation after the time of transfer.

In exchange for these risks, an 83(b) election offers some clear benefits. If the shares become more valuable between the time of transfer and the time they are vested, you have successfully assessed ordinary income tax on the lesser amount. Also, making the election starts the clock on the capital gains holding period, which means that if you sold the shares more than a year after making the election, you would pay capital gains tax at long-term rates. term. Of course, if the value of your shares declines, you will have paid more than you would have paid if you had waited. And since an 83(b) election is irrevocable, there is no way to undo the decision, unless the Internal Revenue Service commissioner grants a special exemption.

There are a few other reasons why you might make an 83(b) election, despite the risks. For example, if the value of the property is nominal at the time you receive it, the tax may be so insignificant that it makes sense to pay it right away in hopes of avoiding a higher tax bill in the future. Going one step further, if you expect the value of the property to increase substantially before your interest in it vests, you may be concerned that you won’t be able to pay the tax when it’s due. For taxpayers who pay the property’s fair market value in the first place, choosing to pay taxes on its fair market value on what was paid would mean no taxes are due. Some taxpayers may wish to make the 83(b) election simply to begin the capital gains holding period.

It is important to note that while making an 83(b) election carries risks in the form of overpaying taxes or paying property taxes that you could lose, not making such an election carries risks of its own, as noted. on. If your property appreciates substantially between the time you receive it and the time it is awarded, you may have a substantial income tax liability, even if you don’t sell the property.

This is how it could work. Abby and Jennifer are hired on the same day for identical roles at a company. After their first year, each is awarded a restricted stock award. The grant has a purchase price of $1 per share and is subject to a four-year vesting period. They each decide to accept the grant and Abby quickly files an 83(b) election, but Jennifer doesn’t.

At the end of the first year, the company’s stock has appreciated to $100 per share. Jennifer recognizes $99 per share as income (the value less the purchase price) on the portion that is granted, even though she does not sell her shares. Abby doesn’t recognize any additional income, since she made her choice a year earlier. Over the next several years, as the shares continue to vest, Jennifer earns an income equal to the difference between the fair market value of the shares at the time of purchase and the purchase price of $1 per share. Abby, having expedited revenue recognition, does not. Assuming both partners stay until they are fully vested, Abby wins because of her lower tax liability. Abby also has earlier access to long-term capital rates, since she started her holding period early.

Of course, an 83(b) election is not always appropriate. Consider a newer employee, Frank, who joins the company a year later when the stock is already at $100 a share. Frank should carefully consider whether he expects the value of the shares to rise, fall or remain the same during the vesting period. Or, going back to Abby, if he needs to leave the company in 10 months and before any of the shares have been purchased, he will have paid taxes on the shares he ultimately lost. In making the choice, it is always important to realistically weigh the probabilities of future outcomes.

If you have stock options on a private company, instead of receiving stock directly, you won’t have to worry about 83(b) elections unless you use the stock options to buy unallocated stock. And if you receive shares with no vesting restrictions, you won’t have to worry about an election at all.

How to make an 83(b) election

A taxpayer wishing to make an 83(b) election must do so immediately upon receipt of the subject property, within 30 days of receipt. The taxpayer, of course, must notify the IRS and must also notify the employer (or whoever has given the property).

While the IRS has created hundreds of tax forms for all kinds of situations, interestingly, there is no official form for those who want to make 83(b) elections. Instead, taxpayers must send a letter to the IRS office where they file their income tax returns. The IRS has provided sample language for such a letter in Revenue Procedure 2012-29. While this language is not required, it is an example that would comply with agency regulations. Information the IRS suggests taxpayers provide when making elections includes:

• A statement that makes the choice. In sample language, this statement reads: “The undersigned taxpayer hereby elects, pursuant to §83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income as compensation for services the excess (if any) of the fair market value of the shares described below over the amount paid for those shares.
• The taxpayer’s full legal name, address, Social Security number, and the tax year associated with the election.
• A description of the property (for example, “1,000 shares of Jennifer and Abby’s Company Inc.”)
• The date the property was received.
• The restriction that will cause forfeiture if not met or the restriction that will expire when acquisition requirements are met
• The fair market value of the property, without the restriction, at the time the taxpayer received it
• Any money paid for the property
• The amount to include in gross income (i.e. fair market value less any payments)
• A statement about the presentation of the election. In sample language, this statement reads: “The undersigned taxpayer will file this election with the Internal Revenue Service office in which the taxpayer files his or her annual income tax return no later than 30 days after the date of transfer of property A copy of the election will also be delivered to the person for whom the services were provided, in addition, the undersigned will submit a copy of the election with his or her income tax return for the taxable year in which the property is transferred. performs the services in connection with which ownership was transferred.”

As the closing statement implies, one copy of the letter must go to whoever granted the property, usually an employer, and a second copy must be included with the year’s income tax return. (And, of course, keep a copy for your personal files.) As with anything mailed to the IRS, a return receipt will prove that the letter was submitted to the agency on time.

Taking the time to understand 83(b) elections and make a timely decision about them can save you quite a bit of fiscal responsibility in the long run. It’s just one of the many ways staying worried about taxes throughout the year can contribute to a happy April.