Michael Gray, CPA’s Option Alert #66

An irregular alert for issues relating to employee stock options

March 4, 2009
© 2009 by Michael Gray, CPA
ISSN 1931-2768

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Tax season is here! Make your appointment now!

There is less than a month and half before April 15.

To have us prepare your income tax returns, start with the online Tax Notebook organizer. Call Dawn Siemer at 408-918-3162 for instructions to get started. We also have a paper organizer, if you prefer. We still need your documents (W-2s, 1099s, receipts for donations) to prepare your income tax returns.

We can prepare most income tax returns using information provided online and by mail. If you wish a personal meeting, please call Dawn Siemer at 408-918-3162 to schedule an appointment. Our calendar is filling up fast!

We expect to file for extensions when we receive clients’ tax information after March 15.

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President Obama enacts tax legislation.

The stimulus bill that President Obama signed on February 17, 2009 includes significant tax legislation and other incentives. The tax hikes for high-income taxpayers discussed during his campaign for office have been postponed until after 2010.

Here are just a few highlights:

  • Certain taxpayers may elect to carry back net operating losses for tax years ended in 2008 three, four or five years. Alternatively, a taxpayer may elect to use the longer carryback for a tax year beginning. (The long carryback can only be used by a taxpayer for one tax year.) A business qualified for the election includes a corporation, partnership or proprietorship with average annual gross receipts of no more than $15 million for the year of the loss and the two immediately preceding tax years.

    Taxpayers who have already filed their tax returns for a year ended in 2008 should note they have until 60 days after February 17 (April 18) to make the election for a long carryback.

  • An individual who is involuntarily separated from employment between September 1, 2008 and January 1, 2010 may elect to pay 35% of his or her COBRA coverage and have it treated as paying the full amount.

    The former employer is required to pay the remaining 65%. The payments will be reimbursed by crediting those amounts against income tax withholding and payroll taxes it is otherwise required to pay to the federal government.

    The Secretary of Labor will issue guidelines about how the program will work, including notice requirements to employees.

    This provision will probably be horrific to implement. Consult with your benefits company and tax advisor about this new requirement as soon a possible!

  • A Making Work Pay Credit equal to the lesser of 6.2% of an individual’s earned income or $400, $800 for married, filing jointly. The credit applies for 2009 and 2010. The IRS will issue new withholding tables for the employee’s share FICA (social security) taxes, to be used starting April 1, 2009. (The employer’s share of FICA is unchanged.)

    The credit will be phased out for individuals with modified adjusted gross income exceeding $75,000 or $150,000 for married, filing jointly.

  • For 2009 only, individuals on fixed incomes, mostly social security recipients, railroad retirees and disabled veterans, will receive a one-time Economic Recovery Payment of $250.
  • An AMT patch is included for 2009. The 2009 AMT exemption amounts are $70,950 for joint filers and surviving spouses and $46,700 for singles and heads of households. (The refundable minimum tax credit was not extended.)
  • The first-time homebuyer credit was increased for 2009 through November 30, 2009 from $7,500 to $8,000. The “interest free loan” feature that applies for residences purchased on or after April 9, 2008 and before January 1, 2009 was repealed for homes purchased that are eligible for the credit during 2009. Now the credit only is required to be repaid if the home is sold within 3 years after the purchase. The credit is still phased out for taxpayers with adjusted gross income in excess of $75,000 or $150,000 for joint filers.
  • An “above the line” deduction will be allowed for sales tax paid for the purchase (not a lease) of a new car from February 17 to December 31, 2009. The sales tax will only be allowed for up to $49,500 of the purchase price of a vehicle and the deduction will be phased out when the purchaser has adjusted gross income exceeding $125,000 or $250,000 for joint filers. The vehicle must first be used by the taxpayer and weigh no more than 8,500 gross pounds.
  • Education credits have been enhanced.
  • 50% bonus depreciation, previously expired after December 31, 2008, has been extended through December 31, 2009. The higher caps for vehicle depreciation have also been extended.
  • The $250,000 equipment expense limit, previously expired after 2008, has been extended through 2009. The deduction is reduced when equipment purchases exceed $800,000.
  • New energy credits have been enacted, including an enhanced tax credit for plug-in motor vehicles.
  • Taxpayers with adjusted gross income less than $500,000 and who have income from a small trade or business that is more than 50% of their adjusted gross income can make 2009 estimated tax payments based on 90% of the tax on their 2008 income tax returns, instead of 100% or 110%. A small trade or business for this purpose has an average number of employees of 500 or fewer.
  • The period for which the built-in gains tax applies to C corporations that convert to S corporations in tax years beginning in 2009 and 2010 is reduced from 10 years to 7 years.

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President Obama’s budget revealed.

President Obama released his “Budget Overview For Fiscal Year 2010 of the United States Government” on February 26.

Here are a few features of the tax provisions in the budget.

  • The Bush tax cuts will not be repealed until they expire after 2010.
  • In 2011, the maximum tax rate for high-income taxpayers is scheduled to return to 39.6% and the maximum tax rate for long-term capital gains will return to 20%.
  • The tax benefit of itemized deductions for taxpayers in the two top tax brackets would be reduced to the amount of benefit received as if the taxpayer was in the 28% tax bracket.
  • The exemptions for the alternative minimum tax will be automatically indexed for inflation.
  • The Making Work Pay credit would be made permanent (See tax legislation passed 2009, above).
  • Eliminate capital gains taxation for small businesses – starting 2014.
  • Make research and experimentation tax credit permanent.
  • Expand net operating loss carryback.
  • Repeal LIFO inventory method starting in 2012.
  • Eliminate most oil and gas company preferences, including expensing intangible drilling costs and the passive activity loss exception for working interests in oil and natural gas properties, starting in 2011.

Bear in mind this budget is a proposal. I expect there will be arguments in Congress about many of the provisions.

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Uncle Sam giveth and Uncle Arnold taketh away.

California was facing a $40 billion budget shortfall. The legislature finally approved a budget with steep spending cuts and tax increases.

  • The California sales and use tax rate is increased by 1%, effective April 1, 2009.
  • The personal income tax rates for 2009 are increased 0.25% or 0.125%, depending on stimulus revenue provided by the Federal government.
  • The dependent exemption credit is decreased to the same amount as the personal exemption credit, effective for 2009 and 2010.
  • The vehicle license fee is increased from 0.65% to 1.15%, effective May 19, 2009.
  • California has adopted a new homebuyer credit.
  • A tax credit was enacted for small businesses with under 20 employees who hire new employees.
  • California has adopted a single sales apportionment factor that will make it more favorable for companies to do business in California.

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Watch recovery rebate credit on 2008 income tax return.

Some taxpayers who didn’t receive an advance cash payment of the recovery rebate credit based on their 2007 income tax returns may find they are entitled to the credit on their 2008 income tax returns because their income has declined, so the credit isn’t phased out. See the worksheet on page 63 of the 2008 federal individual income tax return instructions.

You will need to know how much you received as a stimulus payment to compute the credit. At www.irs.gov, search “How much was my stimulus payment?” to find out the amount received.

The IRS has said that getting the recovery rebate credit wrong can delay receiving your tax refund.

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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”.


What would be the tax consequence if I transferred non-qualified options to my children and they sell them?

Will there be a tax benefit of having the income taxed at a lower tax bracket on their income tax returns?


The ordinary income from exercising the stock options will be included in your wages on your Form W-2. There is no income tax savings from this transfer.

You might have some estate and gift tax savings from making the transfer. Valuing the options for a taxable gift is a complicated and expensive exercise. If you decide to pursue this further, be sure to get professional help.


I exercised a same day sale of 500 shares of company stock. The fair market value was $35 per share and the option price $20 per share. What is the tax basis of the shares? How do you handle the selling expenses?


The tax basis of the shares is $35 per share because you should have reported ordinary income when you exercised and sold them. The brokerage companies usually report the sale price net of selling expenses on Form 1099-B.

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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Subscribe to Michael Gray, CPA’s Option Alert!

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.

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

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