Tax issues for executive employees in the pharmaceutical industry can get complex, so logically enough, you might believe you need a complex tax strategy to address them. However, complexity is not the same as sophistication.
Tax strategies that are merely complex but not sophisticated are reactionary, overcomplicated, and lacking in direction. In contrast, sophisticated tax strategies are proactive and tailored to fit your long-term objectives.
Here, we examine four common tax issues for executive employees in pharma, as well as sophisticated ways to manage them.
Tax Issue 1: Equity Compensation
Equity compensation is a key component of pharmaceutical executives’ total compensation packages. Restricted stock units (RSUs), incentive stock options (ISOs), and non-qualified stock options (NSOs) are common, but each has a distinct tax treatment:
RSUs: Taxed as ordinary income when they vest
ISOs: Subject to capital gains taxes and can trigger alternative minimum tax calculations
NSOs: Spread between the exercise price and the market price taxed as ordinary income at exercise
Timing is key when trying to avoid tax issues for executive employees. For instance, many of my clients sell vested shares or exercise NSOs in years when they anticipate lower income. Donating appreciated shares can also help reduce capital gains tax.
Tax Issue 2: Deferred Compensation
Deferred compensation is a powerful tool for attracting top talent. However, without careful tax planning, it may lead to tax issues for executive employees.
In most cases, deferred compensation is subject to tax when you receive it, not when you earn it. Opting to receive deferred compensation in installments over a period of years may reduce tax liability. But if you’d prefer to receive a lump sum, you may be able to offset some of your tax bill by bunching multiple years’ worth of charitable donations.
Tax Issue 3: Concentrated Stock Risk and Tax Exposure
Concentrated stock risk impacts executives across sectors. I generally advise clients to sell some of their shares and diversify their portfolios to move away from this kind of risk. However, selling off company stock without paying attention to taxes can easily lead to tax issues for executive employees.
Selling stock with the highest cost basis first can help in managing capital gains taxes. If you want to avoid triggering capital gains taxes for now, consider contributing some of your company stock to exchange funds (or “swap funds”) with other investors.
Tax Issue 4: Retirement and Withdrawal Tax Inefficiencies
This is one of the most common tax issues for executive employees. Many people in retirement withdraw from taxable accounts first, tax-deferred accounts second, and tax-free accounts last.
However, because pharma executives generally have well-funded retirement accounts, this approach may lead to high tax bills in some years. For that reason, many of my clients make proportional withdrawals from accounts with different tax treatments to maintain steadier tax brackets throughout retirement.
Need Help With Tax Issues for Executive Employees?
Tax issues for executive employees are uniquely complex. And if you want to make the most of your compensation while reducing tax liability, a sophisticated financial management strategy is essential.
That’s why you need a fiduciary advisor for corporate executives. Fiduciaries are legally and ethically obligated to work in your best interests. When you choose Gibbons Financial Group, you can connect with a fiduciary advisor who has a deep understanding of the pharmaceutical industry and the most common tax issues for executive employees within it.
If you’re interested in learning more about us and what we do, contact us today. Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. And be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.