Employee Stock-Ownership Plans (ESOP)

Contributions:  You do not pay income tax on the value of the stock that your employer deposits in an ESOP on your behalf, or on the contribution you make to buy shares for the account.

Dividends: You may also receive dividends from the stock you have in the account. These dividends will not be taxable while the stock remains in the account.

Distributions: When the stock is distributed from an ESOP, the distribution will be subject to ordinary income tax based on the value of the stock at the time of the distribution. This is so even if you don't sell the stock, although there are special tax rules for stock distributions.

Sale: When you do sell the stock received from an ESOP, any change in value since the time of distribution will be treated as a capital gain or loss. 

For example, suppose stock in your employer, XYZ Corporation, has been contributed to an ESOP account on your behalf for each of the last 10 years.  You left work on disability a year ago, when the stock was worth $50,000.

• As the contributions were made to your account, there was no tax payable on amount of the contributions.
• During the year when you went on disability, you had to declare the $50,000 as ordinary income even though the stock was not sold. 
• If you decide to sell the stock this year for $60,000, the $10,000 difference between $50,000 and $60,000 will be subject to the capital gains tax.. 

NOTE: You could have avoided paying the tax on the increase if you had rolled the distribution into an IRA account and kept the sale proceeds in the IRA.

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