Subject:   NQSO treatment with social security taxes
Date:   Sat, 18 Dec 2004
From:   Frank

Mr. Gray,

1. I am retired over 5 years and on Social Security and recently exercised 3 options. My understanding is I will get a W-2 form from my previous employer and need to report it as income. Can I get the Social Security and Medicare deductions back when I do my taxes since I did not work in the past year and am on Social Security?
2. My understanding is that this income is considered as income from 5 years or more ago and does not go against my Social Security earnings limitation this year. Is that correct and how is that handled on the tax forms?

Thank you in advance for your help!

Frank

Answer

Hello Frank,

1. See the previous answer. You appear to be subject to these employment taxes and won’t receive a refund for them.
2. There is no special disclosure on your income tax return, but the income from the exercise of the non-qualified option is separately disclosed on Form W-2. Hopefully that will help the Social Security Administration determine these aren’t “disqualified” earnings. I believe you are right that your Social Security benefits should not be reduced because of ordinary income received from the exercise of a non-qualified option after retirement, but I don’t have extensive resources about Social Security, so I can’t give you an authoritative answer. Try calling the Social Security Administration at 800- 772-1213 or visit their website at http://www.ssa.gov. Once you reach full retirement age, your benefits aren’t reduced for “excess earnings.”

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”.