NUA

Using Net Unrealized Appreciation with Chevron Stock

As an employee at Chevron, there is a good chance a large portion of your Employee Savings Investment Plan (ESIP) contains Chevron stock. If this is the case, you may have an opportunity to take advantage of Net Unrealized Appreciation (NUA). Generally, distributions taken from tax-deferred retirement accounts are subject to ordinary income tax, but utilizing NUA for the Chevron stock in your ESIP can enable you to take advantage of the capital gains rate, which is typically more favorable than the ordinary income tax rate. This strategy can save you a significant amount on your taxes over the long run.

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To determine if you can benefit from utilizing NUA, take the cost basis (the original cost) of your Chevron stock and compare it to the current market value of the shares. The NUA will be the difference between these two amounts. If there is a large gain, there may be an opportunity to utilize an NUA distribution from your ESIP. The IRS will still require you to pay ordinary income taxes on the cost basis when the distribution is taken and the shares are transferred into a brokerage account, but no additional taxes will be owed until the stock is ultimately sold. The benefit comes when you sell the stock in the future, because you will pay capital gains taxes on the gains as opposed to ordinary income tax.

There are some qualifying guidelines you should be aware of when considering utilizing NUA:

Only shares of Chevron company stock in the ESIP are eligible for NUA tax treatment.
The entire balance of your ESIP must be distributed within one tax year. The ensuing distributions do not have to be taken at the same time.
The distribution must be taken as actual shares of company stock. The shares cannot be converted to cash before the distribution. The NUA distribution must be the first withdrawal taken after retirement.
You must experience a qualifying event that includes either separation from service from Chevron, reaching age 59½, or suffering an injury resulting in total disability or death.

ESIP

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ESO

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Difference

There are some potential disadvantages of utilizing NUA. You will need to pay ordinary income tax on the cost basis of the employer stock immediately. Also, if you fail to meet the required criteria for NUA, the election could be disqualified, and you will owe ordinary income taxes on the full amount of the company stock distribution and any applicable penalty.

Choosing to utilize NUA can provide significant tax benefits if done correctly, but the process can be complex. Insight Wealth Strategies will work with you to determine if utilizing NUA is an option for distributions from your ESIP. We can also help you plan your distributions in a way that may help minimize your tax liability in future years.