Table of Contents

• Second 2008 estimated tax payment is due June 16
• Updated reports on Employee Stock Options and AMT
• Questions and Answers
  • Executive Tax Planning for Employee Stock Options
  • Do I have to report a stock sale on my tax return?
  • Do I have to report ID income on options acquired in CA?
  • How are my taxes impacted by moving to a new state?
• Do you know about our other newsletters?
• IRS Circular 230 Disclosure
• Consult with a tax advisor
• Subscribe to Michael Gray, CPA’s Option Alert

Second 2008 estimated tax payment is due June 16

Remember the second estimated tax payments for calendar year taxpayers are due on June 16. If you have a change in your situation or your estimated taxes are based on your 2008 income and deductions, you should contact your tax advisor now.

If we can be of service with this, call Mike Gray at 408-918-3161.

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Congressional Research Service issues updated reports on Employee Stock Options and AMT

The Congressional Research Service issued updated reports on Employee Stock Options on May 7 and on Alternative Minimum Tax on May 6.

The report on Employee Stock Options is pretty basic. I was a little disturbed that the report says the alternative minimum tax applies to the exercise of qualified stock options. Qualified stock options include incentive stock options and employee stock purchase plans. Only the exercise of incentive stock options is subject to the alternative minimum tax.

The report on the alternative minimum tax is more interesting because of the statistical information included. “It is estimated that repealing the AMT would cost $872.3 billion over the 2007 to 2017 budget window. If the (Bush tax cut) reductions in the regular income tax are extended beyond 2010, the cost would rise to roughly $1.4 trillion.”

“The potential problems of an indexed regular tax and an unindexed AMT have long been recognized by tax analysts. In 1997, approximately 605,000 taxpayers, or about 1% of all taxpayers were subject to the AMT. In 2006, 3.5 million or about 4% of all taxpayers were likely subject to the AMT.”

“Preliminary estimates indicate that by 2010, when the effects of both inflation and the legislative changes contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 are taken into account, the number of taxpayers falling under either the AMT or the AMT limits on their tax credits under the regular income tax would grow to 31 million. If the EGTRRA provisions (Bush tax cuts) are made permanent, then by 2017, 51 million taxpayers would be affected by the AMT.”

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Questions and Answers

To our readers:

The answers to many of your questions can be found in our free reports, “Executive Tax and Financial Planning For Non-Qualified Stock Options” and “Executive Tax and Financial Planning For Incentive Stock Options.”

Question

I exercised non-qualified stock options. The net amount of income was shown on my Form W-2. Do I need to separately report the sale on my income tax return? H&R Block Tax Cut software says “no”?

Answer

If you received a Form 1099-B from the brokerage company showing the sale of the shares, you should report it on Schedule D. The tax basis for the shares is the option price plus the income from the exercise, which should equal the fair market value of the shares on the date of exercise or vesting date, if later and you didn’t make a Section 83(b) election.

Question

I earned stock options while working in California and exercised them two years after moving to Idaho. I filed and paid California state taxes as a non-resident of California for 2007. Now Idaho is asking me to pay Idaho state taxes on the same income. What should I do?

Answer

Claim a state tax credit on your Idaho income tax return for the California tax paid on the income.

See page 8 of the Idaho income tax instructions. You compute the state tax credit at page 2 of Idaho Form 39R and carry the amount to line 22 of Idaho Form 40 (Idaho income tax return).

Question

I received stock options and RSUs from a Massachusetts employer. Now I’m relocating to a California office. How are my state taxes impacted?

Answer

This is not a “short answer” question.

At least some of the income when you exercise your options and as your RSUs vest will be subject to tax in both states, with a potential state tax credit (California Schedule S).

I suggest that you get a copy of FTB Publication 1004, Stock Option Guidelines, from the California Franchise Tax Board’s web site, www.ftb.ca.gov.

Consider getting professional help. That’s our business!

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

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Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA’s Tax & Business Insight.

We are now offering our real estate tax newsletter, Michael Gray, CPA’s Real Estate Tax Letter, free of charge. Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. To subscribe and read a sample issue, visit realestatetaxletter.com.

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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.

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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.

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

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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)

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