Recommend Our Site to Your Friends!

Print This Page

By Michael Gray

Table of Contents

• California increases withholding at exercise of NQSOs
• House of Representatives urges Senate action to eliminate withholding on ISOs and ESPPs
• Increased deduction proposed for capital losses
• Tax relief proposed for depreciated ISO stock
• Will relief be enacted this year?
• What's happening with our website?
• Questions and Answers

  How much of my capital losses can I claim as a tax deduction?

  Am I due any compensation for worthless options?

  Do I have legal recourse for stock options expiring earlier than I expected?

  Do I have to notify the IRS or state tax authorities to issue NQSOs?

• Consult with a tax advisor

California increases withholding at exercise of non-qualified options

Part of budget legislation approved by Governor Gray Davis on September 11, 2002 includes an increase in the withholding rate for California income taxes at the exercise of a non-qualified employee stock option and for bonus payments from 6% to 9.3%, effective for wages paid after 2002. (A.B. 2065.)

One consequence of the increase is employees may be forced to sell the stock received at exercise of the option in order to pay the increased income taxes. Usually we encourage clients who exercise NQOs to sell the stock anyway.

A positive consequence of the increase is fewer taxpayers will be surprised by additional tax due with the California income tax return on April 15.

Employees who estimate their tax will be overpaid because of the increased withholding may adjust the withholding for their other wages down.

Return to Table of Contents

House of Representatives urges Senate action to eliminate withholding on ISOs and ESPPs

The House of Representatives is urging the Senate to finish work on the Pension Security Bill of 2002 (HR 3762). The proposed legislation passed the House on April 11. One of the provisions of the bill would exempt incentive stock options and employee stock purchase plans from employment taxes.

Return to Table of Contents

Increased deduction proposed for capital losses

The House Ways and Means Committee has approved legislation introduced by Representative Lofgren of California, HR 1619, which would increase the capital loss deduction for individuals from $3,000 to $8,250, effective 2002. The deduction would be indexed for inflation in future years. The capital loss deduction hasn't been increased since 1978.

Return to Table of Contents

Tax relief proposed for depreciated ISO stock

A frustrating feature of incentive stock options is the employee must pay an alternative minimum tax based on the spread on the date of exercise, but may never recover the AMT if the stock is sold after the year of exercise at a lower value. Rep. Sam Johnson of Texas, Rep. Neal of Massachusetts, Rep. Herger of California and Rep. Matsui of California have co-sponsored H.R. 5398. Under the proposed legislation, an employee would be entitled to a tax credit for the AMT when the stock is later sold or exchanged at a loss, effective for tax years beginning after December 31, 2001.

The credit would be the lesser of (A) the incentive stock option tax or (B) the greater of $3,000 or 50% of the regular tax for the taxable year. The incentive stock option tax would be the AMT attributable to exercising the stock option in any prior taxable year.

Return to Table of Contents

Will relief be enacted this year?

Many taxpayers have suffered severe financial losses, sometimes with a high tax cost, as a result of the market downturn. As you can see above, several proposals have been introduced for relief. With a Republican-controlled House and a Democrat-controlled Senate, the War on Terrorism distraction and coming elections, I don't think relief will pass this year. But I've been surprised before.

Return to Table of Contents

What's happening with our web site?

After our "grand announcement" of subscriptions for our web site, we have run into some "technical difficulties." Dawn has just returned from a three-week vacation in Eastern Europe, during which our "buy button" setup disappeared. Please stand by.

Meanwhile, if you want to subscribe, order our manual, or get information about our association for advisors, please email your name and phone number to Dawn at info@stockoptionadvisors.com.

Return to Table of Contents

Questions and Answers

Question

I have had $2,400 in long-term capital losses for 2002. How much can I claim as a tax deduction?

Answer

Capital losses are deductible by individuals up to the amount of capital gains plus $3,000 ($1,500 for married persons filing a separate return). Legislation has been proposed to increase the net deduction to $8,250 ($4,125 for married filing separately) for 2002, but I don't expect it to be enacted.

Question

I was given a stock grant for Employer Company during September 1999 for 1000 shares of the company's stock. I stopped working for the company during October 2001, and just found out that in January 2002 they decided the options are worthless. Continuing employees received a cash settlement for the options.

Why wasn't I informed about this, and am I due any compensation?

Answer

I am not an attorney. I suggest that you consult with one.

It doesn't appear the company was obligated to pay a cash settlement to continuing employees, so it doesn't appear you are entitled to compensation. This was apparently an optional "bonus" to reward continuing employees.

I don't know why the company didn't communicate with you about this, except the offer only applied to continuing employees.

Question

I was let go by my company and for some reason I thought I had 90 days to exercise my options after termination. After 50 days I was informed the options expired 30 days after termination according to the stock option agreement (which no one has a copy of). So I've effectively lost my options for 750,000 shares or 2.5% of the company. What legal recourse do I have?

Answer

I'm not an attorney, so I can't answer your question. If you call me, I'll refer you to an attorney who may be able to help.

I am printing your question to remind readers that the Internal Revenue Code provides the maximum guidelines for plan provisions, but the plan document can provide more restrictive requirements.

According to §422(a)(2), in order to qualify as an ISO, the taxpayer must have been an employee of the company granting the option or a parent or subsidiary of the company during the period beginning on the date the option was granted and ending on the date 3 months before the exercise date.

Some companies are more liberal and allow the employee to continue holding the options, which are converted to non-qualified stock options three months after termination. Some companies, like yours, have a shorter time frame for expiration.

The company should have provided a copy of the stock option plan to you when the option was granted. If you didn't receive a copy or a summary of the plan provisions, you may have a basis for a claim.

Question

I work for a UK private company. My company has a US based employee to whom it wants to issue non-qualified stock options.

What needs to be done to issue these? Do I have to notify the IRS or state tax authorities that the option has been issued?

Answer

There is no notification requirement to the tax authorities until the option is exercised.

I suggest that you have an attorney who works with US corporate law work with your UK corporate counsel to draft your stock option plan.

---

Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter.

The answers to most questions can be found in our course, "Secrets of Tax Planning For Employee Stock Options". For details write Dawn Gray at info@stockoptionadvisors.com.

Return to Table of Contents

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication 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.

Return to Table of Contents

Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

Return to Table of Contents

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

P.S.

To receive the next issue of Michael Gray, CPA's Option Alert with more employee stock option tax developments and answers to questions from our readers automatically via email, subscribe by filling out the form below.