If you have a job, then there’s a very good chance that you
have or at least have heard of “vested benefits.” These are, quite simply,
benefits that you are promised but that aren’t quite yours yet- benefits that
will become yours after you fulfill a certain requirement, such as staying
employed by your employer for a certain amount of time. These vested benefits,
however, can be a source of great confusion and concern to employees who are
unsure how to report them on their taxes or if they have to report them at all.
Fortunately, though, it’s not all that difficult to figure out how vested benefits work.
Understanding Vested
Benefits
First things first, you need to understand what exactly
counts as vested benefits. Generally, any benefit that you WILL get but don’t
have yet is a vested benefit. Most commonly, these benefits include things
like:
·
Shares of stocks
·
Pension benefits
·
Stock options
·
Employer 401k contributions
·
Employer contributions to a retirement account
or plan
Benefits may be “cliff vested,” which means you will get
them in their entirety at a certain future date, or “graded vested,” which
means you will get them in small increments over a pre-determined period of
time.
No matter what type of vested benefit you get, the key to
remember is that you’ll only need to pay taxes on it if the benefit you receive
is taxable, and many of the benefits on the above list are not. However, for those that are, such as stock
shares, you’ll have to pay taxes on them even BEFORE you actually receive them,
i.e. before they are fully vested. For
taxable cliff-vested benefits, you’ll need to report the full amount of the
benefit as income when you reach the vesting date. For graded-vested benefits,
you only have to report the amount in taxable benefits you actually received
that year.
If you can keep these helpful tips in mind and always checkin with your accountant or other financial adviser on how benefits affect you
and your taxes, you should have no problem enjoying your vested benefits…and
making sure you pay on them as you’re supposed to!