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Date:   Fri, 21 Dec 2001
From:   Teresa

I found your web site while trying to find information on ISO's. My spouse died this year leaving me stock options, which I have exercised and sold (same day). The shares were exercisable over 4 years, the first quarter had vested this year, but 100% were vested upon his death. The employer has included all options as W-2 income and it appears from your website that the ISO's should not be included as W-2 income. Also, all options were granted as ISO's, but because they all vested this year, many were converted to Nonqualified options due to the $100,000 limit. Are there any exceptions to the $100,000 limit due to vesting due to death?

Thanks,

Theresa

Answer

Date:   26 Dec 2001

Hello Theresa,

There is no exception from the $100,000 because of accelerated vesting resulting from a death.

The income should be reported on Form 1099 MISC for the owner of the options after your husband’s death, possibly his estate, trust or you. However, the income from non-qualified options exercised in the year of death is included on Form W-2 as social security wages and medicare wages. The employer should refer to Revenue Ruling 86-109.

Be glad your husband’s plan had accelerated vesting. Not all of them do.

Remember if the income is subject to state income tax to plan on paying the tax relating to the ordinary income before the end of the year. You need to see a CPA IMMEDIATELY!

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.