Personal planning for corporate directors

Our program at a recent meeting of the Colorado chapter of the National Association of Corporate Directors (NACD-Colorado) focused on issues that directly affect the lives and finances of independent corporate directors. These include tax planning, due diligence, liability protection, personal brand building, resume tips, legal issues and networking. (Watch a video of our entire program.)

Since year end is fast approaching, the tax-planning issues might be useful to all independent directors of corporate boards and other self-employed professionals in 2013.

Mira Finé, CPA, Partner and National Director of Tax Services at Hein & Associates LLP, spoke about personal tax planning and maximization of tax deductions.  Mira’s planning points include:

• Ordinary and necessary unreimbursed expenses such as education and training, travel and automobile use are deductible.  Keep good records and document the place, business purpose and relationship.

• Self-employed persons may deduct health insurance premiums, including Medicare premiums, as an adjustment to gross income instead of an itemized deduction. The deduction includes premiums paid for the director, their spouse and their children under age 27. A tax refund opportunity exists as you may file amended tax returns back to 2010 for the “above the line” deduction for Medicare or other medical insurance premiums.

• Restricted stock grants and exercise of non-qualified stock options are also self-employment income (not investment income) and are subject to the new additional 0.9 percent Medicare tax.

• Directors must also pay Social Security and Medicare taxes as self-employed persons; so, consider these taxes along with stock grants and option exercises when making quarterly estimated income tax payments to avoid penalties.

• Consider making a Section 83(b) election if you receive restricted stock as director compensation and which value you believe may increase substantially in the future.  An election causes the holding period for favorable capital gains treatment to start immediately; however, you must pay currently income and self-employment taxes on the initial value of the stock received.

• Be aware, especially when you can control the timing of various types of income, that an additional 3.8 percent tax on “investment income”, which includes rent income and sales of stock received previously as compensation, started in 2013.

• Use of Charitable Lead Annuity Trusts and Donor Advised Funds can accelerate charitable donations in years when you have a large increase in taxable income due to restricted stock grants and the exercise of stock options.

Neal Malhotra, Vice President and Senior Retirement Plan Consultant with CBIZ Retirement Services, explained a range of retirement savings options available to self-employed directors while deferring and minimizing income taxes. Consider Neal’s suggestions for directors and other professionals who have self-employment income:

• Simplified Employee Pension Plans (SEP) are a low hassle way to form a retirement plan for yourself. No consultant is necessary. SEP-IRAs may be formed and funded as late as October 15 following the tax year if you file appropriate tax return extensions. The maximum contribution (deduction) is 25 percent of net self-employment income as defined by the IRS, limited to a $51,000 deduction for 2013.

• Solo 401(k) Plans are another good opportunity for retirement savings. These plans must be formed by December 31, usually easily at a mutual fund, but may be funded as late as the following October 15, subject to filing the appropriate tax return extensions. Solo 401(k) Plans have a maximum elective contribution of $17,500 for 2013 (plus an additional $5,500 contribution if over age 50), which is helpful when you do not have high director fee income.  In addition, these plans also allow an additional contribution by you as the employer for yourself based on 25 percent of net self-employment income, subject to a maximum total contribution of $51,000 ($56,500 if over age 50) in 2013.

• Single-Participant Defined Benefit Plans (DB Plans) are wonderful tax-deferred retirement savings vehicles for those self-employed persons, including independent directors, who have higher levels of income, especially if that income is not needed for current living expenses. DB Plans are more complicated than other plans but can be easily set up and maintained by benefit consultants. Minimum contributions are required for a certain number of years; however, there is flexibility to modify periodically those required contributions. DP Plans allow you to define your contribution (deduction) levels based on your desired future distributions and the contributions may be as high as $140,000 annually for a 50-year old director and over $200,000 annually for a 60-year old director. DB Plans must be formed by December 31 and do take some time to form; however, actual funding may be delayed to September15 of the subsequent year.

• Solo 401 (k) Plans can have a Roth feature, which allows future distributions to be tax-free at the cost of no tax deduction for current contributions. You may rollover all plans into Roth IRAs if you are willing to pay the income tax currently at the rollover date.

• All of these plans require taxable distribution to start at age 70½.

Obviously, this article and even our NACD-Colorado program cannot describe fully these tax-planning opportunities. You should consult with your CPA or financial advisor as there are limitations and restrictions and tax planning must be tailored to your personal situation.  There is still time in 2013 to implement some of these opportunities, or at least give them serious consideration for adoption in 2014. 

Look for additional personal planning for corporate directors in future articles.