Michael Gray, CPA’s Option Alert #87
An irregular alert for issues relating to employee stock options
December 6, 2010
© 2010 by Michael Gray, CPA
(If you find this information valuable, please pass it on to a colleague!)
Table of Contents
- Happy Holidays!
- The home stretch for year-end planning
- A Santa Cruz live luncheon seminar for tax professionals
- Holiday season half-price sale for books
- Holiday gift—Employee Stock Options book
- Should you use the “escape hatch” this year?
- Remember the refundable AMT credit
- Information returns required for ISO and ESPP exercises
- Year-end planning with uncertainty
- Last chance to adjust withholding for 2010
- Reminder about electronic payments required during 2011
- Financial Insider Weekly broadcast schedule
- Follow me on Twitter, Facebook and LinkedIn!
- Check out my blog.
- Subscribe to our other newsletters!
- IRS Circular 230 Disclosure
- Consult with a tax advisor
- Subscribe to Michael Gray, CPA’s Option Alert
Hanukkah is December 1 – 9 for 2010. Christmas falls on a Saturday this year. I tried to warn you the year is ending fast!
Hope you enjoy celebrating the holidays and that your holidays are happy and safe.
God bless us every one!
The home stretch for year-end planning (and when we’re closed during December)
There is precious little time left for year-end planning.
Dawn Siemer is taking the last week of the year off to be with her family, leaving me to fend for myself.
The office will be closed on December 23 and 24.
If you want to schedule a planning conference, make it now! Call Dawn Siemer on Monday, Wednesday or Friday from 9 a.m. to 5 p.m. (before December 24) to make your appointment. Times available are limited.
A Santa Cruz live luncheon seminar for tax professionals
Michael Gray, CPA will give a live luncheon presentation for the Santa Cruz Discussion Group, Silicon Valley San Jose chapter of the California Society of Certified Public Accountants on Thursday, December 9 from 12:30 to 1:45 p.m. The topic is the IRS Disclosure and Use Rules. The luncheon will be at the Louden Nelson Community Center, 301 Center Street, Santa Cruz. The pre- registered investment is $20 for CalCPA members and $25 for nonmembers. For reservations, call Julie Jameson at 650-802-6221 or register online at www.calcpa.org.
Holiday season half-price sale for books by Michael Gray, CPA
Subscribers to our newsletters can buy any of Michael Gray, CPA’s books for half price until December 31, 2010. The books are Secrets of Tax Planning For Employee Stock Options, 2009 Edition (regular price $199.97, sale price $99.99) and Real Estate Tax Handbook, 2008 Edition (regular price $49.97, sale price $24.99). Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. to order. You can find details about the books at http://www.siliconvalleypublishingcompany.com/products/secrets-of-tax-planning-for-employee-stock-options-2014-edition and www.realestatetaxhandbook.com.
Holiday gift – Employee Stock Options book
As a holiday gift, subscribers to this newsletter can receive a complimentary copy of Employee Stock Options – Executive Tax Planning, 2008 Edition (Regular price $24.97). You only pay $1.50 shipping plus 23¢ California sales tax. Offer expires December 31, 2010. See the enclosed order form, or call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. to order. You can find details about the book at the Silicon Valley Publishing Company.
If you exercised ISOs during 2010, should you use the “escape hatch”?
Remember, if you exercised ISOs during 2010 and didn’t sell the stock, your AMT adjustment will be based on the fair market value of the stock on the date of exercise. However, if you sell the stock before the end of the year of exercise, the AMT adjustment is eliminated. Ordinary income is reported for the excess of the selling price over the option price. I call this strategy “the escape hatch.”
For example, Jean Employee exercised an ISO for 1,000 shares of XYZ stock on March 1, 2010. The fair market value of the shares on March 1, 2010 was $55 per share and the option price was $5 per share. If Jean didn’t sell the stock, she would report additional AMT income of $55 – $5 = $50 X 1,000 shares = $50,000. On December 15, 2010 Jean sells the stock for $15 per share. The AMT adjustment is eliminated and Jean reports $15 – $5 = $10 X 1,000 shares = $10,000 of ordinary income for regular tax and AMT.
There is an important requirement to get this tax benefit. A loss would have to be “allowable” if the stock was sold at a loss. A common transaction that would disqualify an escape hatch is a wash sale. A wash sale happens when replacement shares or an option to acquire replacement shares are acquired during the period 30 days before or 30 days after the sale.
For example, if Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2010, she would still have a disqualifying disposition of the ISO shares, but she would have $50,000 of ordinary income because the escape hatch wouldn’t apply. Her short-term capital loss of $15 – $55 = $40 X 1,000 shares = $40,000 would be disallowed as a current deduction. The disallowed loss would be added to the tax basis of the replacement shares. Therefore, the tax basis of the replacement shares would be $16 + $40 = $56 X 1,000 shares = $56,000.
Remember the refundable AMT credit
Changes adopted as part of the October 3, 2008 “bailout” legislation eliminated the phaseout of the refundable minimum tax credit based on adjusted gross income and created additional refundable credits for interest and penalties paid in prior years relating to an alternative minimum tax for the exercise of an incentive stock option.
The minimum tax credit becomes refundable after a three-year waiting period. Unless Congress takes action, it will expire after 2012. The last year that an alternative minimum tax can be generated that will qualify for at least a partial refundable credit was 2008.
Taxpayers who qualify to receive the refundable minimum tax credit for 2010 can reduce or eliminate their estimated tax payments for 2010.
See the article at our web site http://www.stockoptionadvisors.com/refund.
Information returns required for ISO and ESPP exercises
2010 will be the first year employers are required to issue information returns relating to the exercise of incentive stock options and employee stock purchase plan shares. Employers have been required to report information to employees, but not to the IRS. This new requirement will help employees get information that they need for their income tax returns that some employers haven’t been diligent about reporting. Also, for the first time, the IRS will have an audit trail to track alternative minimum tax reporting by employees who exercise incentive stock options.
Year-end planning with uncertainty.
Congress’s inability to come to grips with the expiration of the Bush tax cuts leaves taxpayers with a dilemma. The promises of solving the procrastination of the last ten years during a one- month lame duck session don’t seem realistic. After a congenial meeting of President Obama with Congressional leaders on November 30, the Republicans are playing hardball, and saying they have no interest in compromise. They say no legislation will be passed until the Bush tax cuts are extended for all taxpayers.
Today’s headlines say, “Bipartisan Tax Deal Near.” Yogi Berra says, “It ain’t over ‘til it’s over!”
Meanwhile, we still don’t have an adjusted exemption for the alternative minimum tax. If Congress does nothing, taxpayers will have increased withholding for their first paychecks for 2011.
What should one do?
The only way to assure getting the current tax rates is to take income this year. Otherwise, gamble on extension of the Bush tax cuts.
That means the usual year-end income deferral and deductions acceleration are out the window.
Consider taking long-term capital gains in 2010. Note the wash sale rules that apply for losses don’t apply for gains. So, you can sell a stock, take the gain, and buy the stock back without losing your tax result.
If you have an installment sale during 2010, consider electing out and reporting the income for 2010 instead of as collections are made.
If you had an installment sale for a previous year, try to collect as much principal as possible during 2010.
Some individuals “harvested” capital losses for depreciated stock in 2009. Remember those loss carryovers will reduce taxable income from capital gains for investments sold during 2010.
Consider accelerating ordinary income to 2010. Cash basis taxpayers can collect retainers or send early billings.
When planning for deductions, consider the alternative minimum tax. State tax deductions, property taxes, and miscellaneous itemized deductions aren’t allowed for the alternative minimum tax.
The American Opportunity Tax Credit is scheduled to expire after 2010. It may be advantageous to prepay 2011 education expenses by December 31, 2010 so that you can claim the credit on your 2010 federal income tax return.
If you want to get a charitable contribution for 2010, consider paying for it with your credit card. The donation is deductible on the credit card transaction date.
Consider the ability to convert a regular IRA or 401(k) account to a Roth account for 2010. Instead of deferring the income to 2011 and 2012, consider electing to have all of the income taxed in 2010 (if you can afford it).
Does your S corporation still have accumulated C corporation earnings and profits? Get them paid out at bargain rates before the year end. The federal tax rate for qualified corporate dividends is scheduled to increase from 15% to 39.6%.
If your corporation has the cash, consider paying a dividend before the year end to take advantage of the current 15% federal tax rate.
If your corporation doesn’t have cash but you can afford to pay the income taxes, consider making a consent dividend from a C corporation. You can receive additional tax basis (investment) in the corporation at the expense of paying a 15% tax instead of a 39.6% tax.
Tax-deferred exchanges aren’t as advantageous when the long-term capital gains rate is 15% versus a future 20%. Remember you can’t “elect out” of an exchange. The transaction qualifies or it doesn’t.
Purchases of over-the counter drugs will no longer be deductible for employee flexible-spending arrangements (cafeteria plans) after December 31, 2010. Stock up on aspirin before January 1, 2011!
The nonrefundable 30% credit (up to $1,500) for qualified energy efficiency improvements to an existing home during 2009 and 2010 is scheduled to expire after 2010. This may be your last chance to get the tax credit for installing insulated windows or a more efficient furnace or air conditioner.
If you have an IRA and you are over 70 ½, remember to take your required minimum distribution by December 31 (April 30 of next year if you reached age 70 ½ during 2011). Individuals with inherited retirement accounts or who are taking distributions as a series of substantially equal payments also must take required distributions by December 31.
Remember the federal gift tax rate for 2010 is 35% (after the $1 million lifetime exemption) and that the generation-skipping tax is repealed for 2010. Now may be the time for making direct gifts to grandchildren. Also remember there is a $13,000 annual exclusion per donee, per donor for present interest gifts.
Businesses can take advantage of the extension of 50% bonus depreciation and higher expense (up to $500,000!) election available for 2010 by making year-end purchases of depreciable assets. Remember, the asset must be in service before the end of the year to qualify for depreciation.
This list is incomplete. Consider meeting with a tax advisor to review your situation. (That’s our business! Call Dawn Siemer at 408-918-3162 Mondays, Wednesdays and Fridays before December 24 from 9 a.m. to 5 p.m. to make an appointment.)
Last chance to adjust withholding for 2010.
If you have enough control over your payroll, review your 2010 withholding. Unlike estimated tax payments, withholding is consider paid evenly during the year, even when most of it is paid at the year-end. You can avoid penalties for underpayment of estimated tax by “catching up” on underwithholding in December.
Reminder about electronic payments required during 2011.
Almost all employers will have to make federal tax deposits, including payroll tax deposits, using the Electronic Federal Tax Payment System (EFTPS) starting January 1, 2011. If you aren’t already set up, do it now because it takes a little time.
California has been waiving penalties for high income taxpayers who haven’t made their estimated tax payments at the Franchise Tax Board Web Site, www.ftb.ca.gov. Electronic payments are required once a person (a) makes an estimated tax or extension payment over $20,000, or (b) files an original tax return with a tax liability over $80,000. The 1% penalty will no longer be waived effective with the January 15, 2011 installment. Once you do it, you’ll wonder what the fuss was about. If you need help, your tax return preparer can get you started (for a fee).
Financial Insider Weekly broadcast schedule for December and January.
Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 7:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.
Here are the scheduled interviews for December and January:
- December 1, Michael Desmarais, Attorney, “Your rights as a beneficiary of an estate or trust”
- December 8, Robert Temmerman, Jr., Attorney, Temmerman, Cilley & Kolmann, “I’m an executor. Now what?”
- December 15, Robert Temmerman, Jr., Attorney, Temmerman, Cilley & Kolmann, “I’m a trustee. Now what?”
- December 22, James Brown, ASA, CFP®, Perisho, Tombor, Ramirez, Filler & Brown PC, “The Role of the Business Valuation Specialist”
- December 29, Frank Doyle, Attorney, WealthPLAN, “Estate Planning Using Family Limited Partnerships”
- January 5, David Beck, CFP®, Bay Area Planners, “Budgeting and Student Positioning for a College Education”
- January 12, David Beck, CFP®, Bay Area Planners, “Financial Aid and Tax Planning for a College Education”
- January 19, Kathleen Wright, Attorney, American Red Cross, “Preparing Your Finances For A Disaster”
- January 26, Naomi Comfort, Attorney, Hawks & Comfort, LLP, “Health Care Reform Update”
Financial Insider Weekly is also broadcast as follows:
- Sunday at 5:30 a.m. on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
- Sunday at 5 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
- Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
- Thursday at 7 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
- Thursday at 10 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Friday at 4 p.m. on cable channel 15 in Cupertino, Los Altos and Mountain View.
- Friday at 4:30 p.m. on Comcast channel 15 in Los Gatos
- Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, “public access TV”
Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com , and click on “Past Episodes.”
Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.
Hope you can watch or record the show. Please tell your friends about it!
Questions and Answers
Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to firstname.lastname@example.org.
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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.
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.
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.
Subscribe to Michael Gray, CPA’s Option Alert!
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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)