Question

Which of the following statements regarding a taxpayer who receives a lump-sum plan distribution consisting at least partially of employer stock is(are) CORRECT?

1. The net unrealized appreciation (NUA) portion of a lump-sum distribution stock is taxed at ordinary income tax rates when sold.
2. The taxpayer will not be liable for income tax on the net unrealized appreciation (NUA) portion of the distribution until the stock is sold or otherwise disposed of.

Answer 1

BOTH STATEMENTS ARE CORRECT

1.The net unrealized appreciation (NUA) portion of a lump-sum distribution stock is taxed at ordinary income tax rates when sold.

EXPLANATION -

Must pay ordinary income taxes on the cost basis of the securities in the plan when they are distributed from the employer-sponsored plan.

2.The taxpayer will not be liable for income tax on the net unrealized appreciation (NUA) portion of the distribution until the stock is sold or otherwise disposed of.

EXPLANATION -Pay long-term capital gains taxes, instead of ordinary income taxes, on any NUA when the securities are sold. This may be particularly useful for individuals who have an immediate cash need (A tax professional can help you assess whether this makes long-term sense for you depending on your current and future tax brackets and expected capital gains rates)