The Nebraska Special Capital Gains/Extraordinary Dividend Election, elected and claimed on Form 4797N, can provide a substantial tax break for employees who acquire company stock over their years of employment. This election allows employees who own stock in their employer, or former employer, to exclude that stock’s capital gains income from their Nebraska taxable income under certain circumstances.
More and more employers are offering stock purchase plans and stock-based compensation to their employees, which can make for an excellent opportunity to avoid state income tax on capital gains from the sale of a stock in Nebraska. Some questions to consider if you (or your company) might benefit from this rare opportunity in Nebraska tax law:
- Does your employer offer an employee stock purchase program?
- Do you receive employee stock grants from your employer?
- Do you own stock in and work for your own company?
- Did you know that Nebraska offers tax breaks for these situations?
Taxpayer Example
While employed at Acme Company, John Jones accumulates 2,000 shares of Acme stock.
John’s basis in his Acme stock is $90,000. He sells all of the stock for $200,000, producing $110,000 in taxable capital gain income for that tax year.
Federal Taxes
- John pays his ordinary tax rate on the short-term capital gains (stock held for one year or less)
- John pays the lower capital gains rate on his long-term capital gains (stock held for longer than one year)
Nebraska Taxes
- By filing Form 4797N, John can elect to exclude his Acme stock’s income from Nebraska taxation.
- This allows John to exclude the $110,000 in capital gains from his Nebraska taxable income, generating a state tax break of approximately $7,500.
John can also sell only a portion of his stock each year. Once John makes the election, he can exclude his Acme stock capital gains income in subsequent tax years.
How it Works
Each Nebraska resident can elect one capital stock for the exclusion. This is a one-time, lifetime election that can’t be changed. So, for example, if while working for Union Pacific Railroad, you make the 4797N election for UNP stock and later leave for a new job with ConAgra, you cannot change which stock you have elected. However, to use an alternate example: if one spouse works for First National Bank of Omaha and the other spouse works for Werner Enterprises, each spouse can make a separate election for their respective employer’s stock.
There are a few additional stipulations as well. The stock must be acquired by the individual either:
- On account of employment by the corporation, or;
- While employed by the corporation (this also applies to owners who work for their company)
In addition, if you elect the stock of a publicly traded company, the corporation must have conducted business in Nebraska for at least three years before your first sale or exchange of stock.
For non-publicly traded capital stock, further limitations apply:
- The company must have at least five shareholders, and;
- No more than 90% of the capital stock can be owned by a single shareholder or group of related shareholders
If you live in Nebraska and own stock in your employer or company, we can help you identify appropriate opportunities for tax savings. To find out how one of the Certified Financial Planner™ professionals from our offices in Omaha or Lincoln can help you with your employer stock questions, reach out to our team to discuss your situation.
Author: Rebecca A. Barnes, CFP®, EA
Rebecca is a tax and financial planning practitioner with Callahan Financial Planning Company, serving clients in San Rafael, San Francisco, and Mill Valley in Northern California, in Omaha and Lincoln in Nebraska, and in the Denver metro area in Centennial Colorado.