Do I have to pay taxes on NQSOs allocated to my ex-wife?

September 23, 2011

Date:   Sun, 29 Aug 2010
From:   B.

I am in the process of getting divorced. I have unvested NQSOs, a portion of which have been allocated to my ex-wife. My employer does not transfer unvested options to a non-employee spouse, and has informed me that upon exercise, the bargain element for both of our positions will be reported on my W-2. Income taxes and employment taxes will be withheld under my social security number.

How can I pass these items to my ex-wife for her share?


Date:   8 Sep 2010

Hello B.,

According to the IRS, the employment taxes are yours. (Revenue Ruline 2002-22.)

The IRS gives your employer guidance for options that are transferred to your ex-wife in Revenue Ruling 2004-60. The employer should issue a Form 1099-MISC, and withhold income taxes to be transmitted with Form 945.

There are no regular rulings that I know of yet for the “constructive trust” arrangement that you have. In a private ruling, the IRS has said that the non-employee spouse should report the compensation from the exercise of the NQSOs and get credit for the income tax withholding relating to the exercise. See Letter Rulings 200519011 and 2000646003. Consider applying for your own ruling based on having similar facts.

You should make a disclosure statement on your income tax return showing the total amount of income reported on Form W-2 and the amounts allocated to your ex-wife. Don’t efile your tax return for any years that you need this disclosure.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, “Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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