Michael Gray, CPA’s Option Alert #96
An irregular alert for issues relating to employee stock options
December 16, 2011
© 2011 by Michael Gray, CPA
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Table of Contents
- Happy holidays!
- Our holiday schedule.
- It’s time for year-end tax planning.
- If you exercised ISOs during 2011, should you use the “escape hatch”?
- Remember the refundable AMT credit.
- Information returns required for ISO and ESPP exercises.
- Should you make additional tax payments before December 31?
- Should you donate publicly traded stock?
- Donating a car to charity?
- Should you make a donation from an IRA account?
- Do you have unrealized capital losses?
- Will 2011 and 2012 be your last chance to 15% long-term capital gains?
- Should you make a Roth conversion during 2011?
- Should you buy business equipment by December 31, 2011?
- Should you invest in small business stock before December 31, 2011?
- Would it be better to be married in December 2011 or January 2012?
- Should you make family gifts before the end of 2011?
- Financial Insider Weekly broadcast schedule.
- Follow me on Twitter, Facebook and LinkedIn!
- Check out my blog
- Do you know about our other newsletters?
- IRS Circular 230 Disclosure
- Consult with a tax advisor
- Subscribe to Michael Gray, CPA’s Option Alert!
Yes, it really is that time of year. We hope that you and your family enjoy a happy and safe holiday season, and that 2012 will be a healthy and prosperous year for you.
Our holiday schedule.
Michael Gray will be out of the office from December 16, returning December 27. Dawn Siemer won’t be available after December 12 until January 2.
It’s time for year-end tax planning.
As you can see from the above schedule, Michael Gray will have very limited availability for year-end tax planning meetings. Reserve your appointment now by calling Michael Gray directly on the days he is in the office after December 12 at 408-918-3161. Although Michael Gray usually only meets with clients on Tuesdays and Thursdays, he has opened up more days this December.
If you exercised ISOs during 2011, should you use the “escape hatch”?
Remember if you exercised ISOs during 2011 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, 2011. The fair market value of the shares on March 1, 2011 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, 2011 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, 2011, 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.
Remember that 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 whol qualify to receive the refundable minimum tax credit for 2010 can reduce or eliminate their estimated tax payments for 2011.
See the article at our web site http://www.stockoptionadvisors.com/refund.
Information returns required for ISO and ESPP exercises.
Employers are required to issue information returns relating to the exercise of incentive stock options and employee stock purchase plan shares. This requirement will help employees get information that they need for their income tax returns that some employers haven’t been diligent about reporting in the past. The information returns provides and audit trail to the to track alternative minimum tax reporting by employees who exercise incentive stock options.
Should you make additional tax payments before December 31?
State estimated tax payments and early property tax payments made by December 31 are generally tax deductible for the regular tax. However, many people are finding they are subject to the alternative minimum tax. Deductions for taxes (and miscellaneous itemized deductions) aren’t allowed for the alternative minimum tax, so there could be no benefit for a tax prepayment. A tax advisor can project your tax picture to determine if the AMT will apply. Turbo Tax and other tax preparation software can also be used to make the computations.
Should you donate appreciated publicly traded stock?
It’s the season for giving. Many of us make extra donations during December to share our bounty with others. Appreciated publicly-traded stock that has been held for more than a year is an ideal asset for a donation. Under the Internal Revenue Code, the long-term capital gain is excluded from taxable income and the charitable contribution deduction is the fair market value of the stock, so there is a double tax benefit. Also, publicly traded stock isn’t subject to the appraisal requirements that apply for other property. It’s a win-win-win! Remember to get a good acknowledgement letter to document the donation, including a statement that “no goods or services were received in exchange for the donation”.
Donating a car to charity?
Remember that an appraisal is required for noncash contributions with a value exceeding $5,000. See Form 8283 and instructions as the IRS web site, www.irs.gov. (There is a Declaration of Appraiser on the form.)
Should you make a donation from an IRA account?
Individuals who are over age 70 ½ can have up to $100,000 of distributions made from their IRA directly to a charity. The distribution can satisfy the required minimum distribution requirement and is excluded from taxable income. Since the distribution is excluded from taxable income, more deductions will be allowed for medical expenses and miscellaneous itemized deductions, and the limitation that otherwise applies to charitable contributions will not apply to the distribution.
If you can afford it, this is a great tax benefit that also benefits the community. (Remember, you don’t have to give the whole $100,000!)
Do you have unrealized capital losses?
With the roller coaster movement of the stock market, many people have investments that have declined in value. If you have realized capital gains during 2011, be sure to sell the depreciated stock before the end of the year to offset the losses against the gains. Be careful for the “wash sale” tax trap. If you buy the same stock or get an option to buy the same stock during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed.
Will 2011 and 2012 be your last chance for 15% long-term capital gains?
If Congress does nothing, the Bush tax cuts are now set to expire after 2012. I don’t expect tax reform or extensions to be done until some time after the 2012 election. This could be a good time to report capital gains, while tax rates are “on sale.”
Should you make a Roth conversion during 2011?
Conversions of regular IRAs and 401(k) accounts to Roth accounts are now permitted without a limitation based on adjusted gross income. Federal tax rates are at a historic low and may be increasing when the Bush tax cuts end after 2012. Distributions from Roth accounts after a waiting period are tax free, and no distributions are required to be taken during the original account owner’s lifetime.
Should you buy business equipment by December 31, 2011?
Tax relief legislation increased the bonus depreciation allowance for new business equipment (subject to special limitations for cars and trucks) to 100% for equipment acquired and placed in service after September 8, 2010 and before January 1, 2012. That means expenditures for new equipment purchased during 2011 are currently deductible, without limitation (except for most cars and trucks). If you were planning to make a business equipment purchase soon, you should go ahead by December 31, 2011, because 100% bonus depreciation is currently scheduled to expire after 2011.
The Section 179 expense election is still available for up to $500,000 of used equipment, with a phaseout with more than $2 million of acquisitions that won’t apply for most small businesses.
Should you invest in small business stock before December 31, 2011?
There is a 100% exclusion of gain when certain requirements are met for an investment in qualified small business stock during 2011. The exclusion is scheduled to decrease for investments made after 2011. See your tax advisor for more information.
Would it be better to be married in December 2011 or January 2012.
It can make enough of a difference to make a nice contribution to your honeymoon. If both spouses have high incomes, January 2012 is probably better. If one spouse has most of the income, December 2011 is probably better. “The devil is in the details.” The only way to really know is to make tax projections.
Should you make family gifts before the end of 2011?
Remember you can give up to $13,000 per year to each donee without being subject to gift tax. This means a husband and wife can give up to $26,000 to each of their children.
In addition, the lifetime gift exemption is currently $5 MILLION! After 2012, the exemption is scheduled to decline to $1 million. (Again, whether Congress will extend the $5 million exemption probably won’t be resolved until after 2012.) Now may be a great time to make a big gift during 2011 or to plan a big gift during 2012. See your tax advisor and estate planning attorney. Use common sense. Don’t make a big gift if it puts you in financial distress.
Financial Insider Weekly broadcast schedule for December and January.
Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 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:
- November 4, 2011, Mark Erickson, attorney, “Divorce – California Style: Child Custody”
- December 16, 2011, Craig Martin, CFP®, The Family Wealth Consulting Group, “The Role of the Fee-Only Financial Planner”
- December 23, 2011, William Mitchell, CPA, “I’m Being Audited By The IRS! Now What Should I Do?”
- December 30, 2011, William Mitchell, CPA, “I Owe Back Taxes To The IRS! Now What Should I Do?”
- January 6, 2012, Scott Haislet, CPA and Attorney, “Real Estate Professionals and Passive Activity Losses”
- January 13, 2012, Scott Haislet, CPA and Attorney, “1031 Tax Deferred Exchanges of Real Estate”
- January 20, 2012, Bettie Baker Marshall, Attorney, “Caring for incapacitated family members and friends”
- January 27, 2012, David Beck, CFP®, “How a family can pay for a college education”
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 3:30 p.m.on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
- Monday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga.
- Tuesday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
- Tuesday at 9:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County.
- 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 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”.
- Saturdays at 12:30 p.m. on Comcast channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
Past episodes are available at https://www.youtube.com/user/financialinsiderweek.
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!
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.
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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)