Michael Gray, CPA’s Option Alert #98
An irregular alert for issues relating to employee stock options
February 10, 2012
© 2012 by Michael Gray, CPA
(If you find this information valuable, please pass it on to a colleague!)
Table of Contents
- Tax season is here!
- Information returns required for ISO and ESPP exercises
- Schedule D radically changed for 2011
- More high-income taxpayers audited
- Financial Insider Weekly broadcast schedule
- Questions and Answers
- 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!
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 have a secure internet portal for sending documents. Email Dawn Siemer at firstname.lastname@example.org 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!
Information returns required for ISO and ESPP exercises
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 22, 2012 or efiled by March 31, 2012.
Schedule D (Capital Gains and Losses) radically changed for 2011 individual income tax returns.
The IRS has issued a changed Form 1040, Schedule D and new Form 8949 for 2011. The forms are totally redesigned to accommodate information about the tax basis (cost to for tax gain or loss) of securities sold that is being reported by securities brokerage companies for securities purchased in 2011 forward. The forms require disclosure of adjustments to the reported cost and have many special codes.
The tax basis reported by the securities brokerage company will occasionally be wrong and can be adjusted at column (g) of Form 8949.
Separate Forms 8949 must be prepared with boxes checked for sales reported on Form 1099-B with basis reported to the IRS, sales reported on Form 1099-B without basis reported to the IRS, and other sales.
In the past, the sale of a residence for which the gain was excluded wasn’t reported on Schedule D. Now it’s reported on Form 8949 with the exclusion entered as a negative number in column (g) and code “H” in column (b).
This form is sure to create headaches for 2011 income tax returns. Read the instructions carefully, even if you are providing information to a tax return preparer. You can find them under “forms and publications” at www.irs.gov.
IRS says more high-income taxpayers are audited
According to the IRS, one in eight individuals with income over $1 million were audited in fiscal year 2011. The coverage rate increased from 8.36% in fiscal year 2010 to 12.48% in fiscal year 2011.
The audit coverage rate for individuals with incomes $200,000 and higher increased from 3.1% in fiscal year 2010 to 3.93% in fiscal year 2011.
(IRS news conference, http://www.irs.gov.)
Financial Insider Weekly broadcast schedule for February and March.
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 the rest of February and March:
- February 10, 2012, Hilary Martin, CFP®, The Family Wealth Consulting Group, “Planned saving to reach your financial goals”
- February 17, 2012, Professor Patricia Cain, attorney, Santa Clara University, “Income tax problems of same-sex couples”
- February 24, 2012, Professor Patricia Cain, attorney, Santa Clara University, “Estate and gift tax problems of same-sex couples”
- March 2, 2012, Lamarr Baxter, The Entrust Group, “Investing in real estate using your Roth or IRA account”
- March 9, 2012, Lamarr Baxter, The Entrust Group, “Making alternative investments besides real estate using your Roth or IRA account”
- March 16, 2012, Alan L. Nobler, attorney at law, “How a collaborative team can help preserve your legacy”
- March 23, 2012, Raymond Sheffield, attorney, Sheffield Law Office, “Estate and gift tax problems for a non-citizen spouse”
- March 30, 2012, Raymond Sheffield, attorney, Sheffield Law Office, “Estate planning for retirement accounts”
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
- 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
- Wednesday at 8 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
- Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
- 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”
- Friday at 8:00 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
- 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 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 email@example.com.
I left a private company during December, 2011. I have incentive stock options, which I must exercise by March 1 or they will lapse.
The company will either remain private, be acquired by a public company, or issue an IPO.
If the company remains private, what happens?
If the company is acquired by a public company, what happens?
I think I understand what will happen with an IPO.
If the company remains private, you will receive restricted stock which you might not be able to sell. You could have income subject to the alternative minimum tax. You need to get the facts about the fair market value of the stock (usually determined based on a valuation study) compared to the option price. Avoid putting yourself in financial distress if there is a big tax liability. You might have to “walk away” from some of the options.
If the company is acquired, the consequences will depend on how the acquisition is structured. Hopefully you will be able to sell your shares or shares of the acquiring company’s stock. A problem could be timing. You could owe an alternative minimum tax before the acquisition takes place.
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.
Check out my blog.
I have also started a blog at michaelgraycpa.com. Check it out!
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.)