Michael Gray, CPA’s Option Alert #89

An irregular alert for issues relating to employee stock options

February 11, 2011
© 2011 by Michael Gray, CPA
ISSN 1931-2768

(If you find this information valuable, please pass it on to a colleague!)

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Happy Valentine’s Day!

Valentine’s Day is great day to express your appreciation for loved ones. My daughter, Holly Baker, tells me her restaurant, Marché Aux Fleurs in Ross, California, is fully booked Saturday and Monday. Good luck finding a seat at your favorite restaurant, if you haven’t already made a reservation.

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Tax season is here! Make your appointment now!

There are only about two and one-half months left before the tax return due date. Time to get started now!

If we prepared your income tax returns last year, you should have already received instructions in the mail. If you haven’t, please call Dawn Siemer at 408-918-3162.

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 are setting up a secure internet portal for sending documents. Call Dawn Siemer for instructions.

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!

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Information returns required for ISO and ESPP exercises.

Just another reminder that 2010 is the first year for which information returns are required to be submitted to the IRS by employers about exercises of incentive stock options (ISOs) and for employee stock purchase plans (ESPPs). The information returns are Forms 3921 and 3922. The transmittal for the forms is Form 1096. The forms should be given to employees by January 31 and sent to the IRS. The forms should be mailed to the IRS by February 28, 2011 or efiled by March 31, 2011.

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It’s better to report deferred comp early for employment taxes.

The IRS has issued some emailed advice to remind us that there is a choice of when to report and pay FICA (social security) and Medicare wages for non-qualified deferred compensation. The income can be reported when the compensation is deferred or when it is paid. Since many employees will already be over the FICA limits for the year the income is deferred and may not have any other wages when the deferred compensation is paid, it’s usually better to report the income when it’s deferred. Also, deferred compensation plans usually pay additional amounts for investment income from the time the income is deferred until it is paid. That means the investment income will be subject to employment taxes if it isn’t reported in the year it’s deferred.

If FICA and Medicare aren’t paid when the income is deferred, they will automatically apply when it is paid, even if the employer or payroll service made a mistake.

(ECC 201025053, ECC 201025055, ECC 201025056.)

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Financial Insider Weekly broadcast schedule for February and March.

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 the rest of January and February:

February 9, Peggy Martin, ChFC, the Family Wealth Consulting Group, “Long-term care insurance”
February 16, Dean Fabro, Bank Of The West, “Small Business Financing”
February 23, Janis Carney, Attorney, Carney, Sugai & Sudweeks, LLP, “Veteran’s Administration Pension Benefits for Long-Term Care”
March 2, Lamarr Baxter, Entrust Administration, “Investing in real estate using your IRA or Roth account”
March 9, Lamarr Baxter, Entrust Administration, “Making alternative investments besides real estate using your IRA or Roth Account”
March 16, Professor Patricia Cain, Santa Clara University, “Income tax problems of same sex couples”
March 23, Professor Patricia Cain, Santa Clara University, “Estate and gift tax problems of same sex couples”

Financial Insider Weekly is also broadcast as follows:

  • 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!

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

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

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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 mgray@stockoptionadvisors.com.

Question

I exercised my ISO last year. The amount was included in my W-2. Do I still have to report the stock sale on Schedule D?

Answer

Assuming you received Form 1099-B for the stock sale, yes. If you don’t, the IRS will probably issue a notice suggesting you have underreported your income.

Your tax basis for the stock will be the option price paid plus the income reported on Form W-2. (I’m assuming there was no stock swap.) Employers usually give a Statement of Taxable Income for exercised ISOs that details this information.

If you made a same-day exercise and sale, you should have zero income or a small loss.


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Follow me on Twitter, Facebook or LinkedIn!

If you enjoy Twitter, please follow me at twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

I’m also on Facebook and Linked In. You can also follow me on other social media sites, www.facebook.com and www.linkedin.com/in/michaelgraycpa.

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Check out my blog.

I have also started a blog at michaelgraycpa.com. Check it out!

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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.

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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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