Michael Gray, CPA’s Option Alert #102

An irregular alert for issues relating to employee stock options

July 1, 2012
© 2012 by Michael Gray, CPA
ISSN 1931-2768

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

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It’s time for tax planning and working on amended, extended and late income tax returns

It’s time to have a second look at income tax returns that were filed for possible amended income tax returns. Taxpayers who filed extensions are also looking for help getting their income tax returns done.

If you would like our help, call Michele Brantley on Wednesdays from 9 a.m. to 5 p.m. Pacific Time to make an appointment. Michele’s telephone number is 408-918-3162.

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The year is half over! How’s it going?

Remember those New Year’s resolutions, personal financial plans and business strategic plans that it seems you made just yesterday? Are they being implemented? Have you had any significant transactions that we should be discussing? Have you made that appointment with an attorney to have your estate plan done? May we be of service in helping you accomplish your goals during the last half of the year?

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Dawn is on maternity leave.

We’re expecting a new granddaughter late in July, so Dawn is taking some time to prepare and to care for her new baby girl. Michele Brantley will be handling Dawn’s duties in her absence, which is a challenging job! Dawn’s plan is to return in October to help process returns for the final extended due date for 2011 individual income tax returns, October 15.

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IRS issues form for Section 83(b) election.

The IRS has issued a suggested form to make a Section 83(b) election, and examples of the consequences of making the election.

The default rule under Internal Revenue Code Section 83(a) is no income is reported by an employee when property received as compensation for services when the property isn’t vested. (The property is subject to forfeiture pending rendering future services.) Income for such property based on the fair market value is taxable when the property vests.

For example, in year one, Jane Employee early exercises a nonvested nonqualified stock option. She pays $100 and the stock has a fair market value of $10,100 when the option is exercised. Since Jane didn’t make any different election, there is no taxable income when the option was exercised.

In year two, the stock vests when the fair market value is $20,100. Jane must report ordinary income (usually wages) of $20,100 – $100 = $20,000.

Alternatively, a taxpayer may elect to have the vesting restriction disregarded by making a Section 83(b) election within 30 days after receiving the property. (With a non-qualified stock option, the property is received when the option is exercised.) If Jane made a timely Section 83(b) election in the above example, she would have reported $10,100 – $100 = $10,000 as ordinary (usually wages) income in year one for exercising the option. The compensation amount is added to the tax basis (cost to compute gain or loss for the stock.) With a Section 83(b) election, Jane would report $20,100 – $10,100 = $10,000 capital gain in year two for the sale of the stock.

There is a downside to making a Section 83(b) election. If the value of the asset falls, no loss is deductible for the amount reported as income as a result of making the election when the property was received. With the same initial facts of the first example, but a Section 83(b) election was made. Jane sells the stock in year 2 for its fair market value, $100. Jane’s loss is disallowed. ($100 – $10,100 = -$10,000 reduced by $10,000 disallowed loss for income reported for exercise in year one.

The IRS has issued suggested language to make the Section 83(b) election, which must be mailed to the IRS within 30 days after receiving unvested property for services. (I recommend mailing the election form in duplicate with a self-addressed, stamped envelope so the IRS can return a date-stamped copy of the election to keep in your file.)

(Revenue Procedure 2012-29, June 27, 2012.)

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Should you make a significant gift during 2012?

You might recall that the exemption equivalent for the federal estate and gift taxes has temporarily been increased for 2011 and 2012. The exemption equivalent for 2012, adjusted for inflation, is $5,120,000. The maximum estate and gift tax rate is 35%.

After 2012, the exemption equivalent is scheduled to be $1 million and the maximum estate and gift tax rate is scheduled to be 55%.

Married couples with more than $10 million in net worth should be seriously considering an aggressive gift plan for 2012. The benefits of the exemption can be leveraged using a family limited partnership or life insurance.

There is a risk of a “clawback” in an estate tax return for decedents dying after 2012, but it still seems worthwhile to seriously consider making a significant gift during 2012. (See the blog post below for an explanation.)

You should only go ahead with the gift plan after consulting with your estate planning attorney and tax advisor.

See my blog post on this subject. (Call Dawn on Mondays, Wednesdays, and Fridays at 408-918-3162 if you want us to mail you a copy.)

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Should you consider making a charitable remainder trust?

If you have a significantly appreciated asset, such as publicly traded stock, that would qualify for a long-term capital gain if sold, you might consider setting up a charitable remainder trust. Current low interest rates result in a bigger tax deduction for gifts to such trusts. When you make a gift to a charitable remainder trust, the trust can sell the appreciated asset tax free. You get a current tax deduction for the remainder interest, subject to a 30% of adjusted gross income limit, with a carryover for the donation over the limit. Then the trust can make diversified investments and pay you income during your lifetime. The balance of the trust is distributed to a qualified charity at your death.

These trusts are usually made by individuals who are interested in benefiting a charity they like, because the principal of the trust is not going to their families. The principal is often replaced using life insurance, possibly in an irrevocable life insurance trust.

There is an annual cost for maintaining these trusts for tax return preparation, asset management and possibly trustee fees, so they should only be used for significant gifts.

If you are interested in finding out more, consult with your estate planning attorney and tax advisor, or call 408-918-3162 on Wednesdays from 9 a.m. to 5 p.m. for an appointment to meet with Michael Gray.

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Community public access television needs our help.

Public access television is a vital part of our educational outreach to various communities. These are usually nonprofit, charitable organizations, like public television stations. Unlike those stations, most of the programming for the public access stations comes from local producers.

This programming includes the local arts, productions by students at local schools, community outreach by churches, independent local producers discussing current social issues, educational programming by local providers like ourselves and much more. In other words, public access television makes a unique, important contribution to the communities it serves.

With the difficult times we are experiencing, many public access stations are facing severe financial challenges, and might not survive without more community financial support. I urge you to consider making a donation to your local public access television station. Here is a link for a list of public access television stations in California: http://www.communitymedia.se/cat/linksca.htm.

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Financial Insider Weekly broadcast schedule for July and August.

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 July and August:

July 6, 2012, David Howard, attorney, Hoge, Fenton Jones & Appel, “Information reporting requirements for foreign bank accounts and foreign trusts”
July 13, 2012, James Brown, ASA, CFP®, Perisho, Tombor, Ramirez, Filler & Brown, PC, “The role of the business valuation specialist”
July 20, 2012, Dean Fabro, Bank of the West, “Small Business Financing”
July 27, 2012, Francis Doyle, attorney, WealthPLAN, “Preserving family assets using a family limited partnership or LLC”
August 3, 2012, Judy Barber, Family Money Consultants, LLC, “The transfer of family wealth to the next generation: What’s the money for?”
August 10, 2012, Judy Barber, Family Money Consultants, LLC, “Raising money-smart kids in the midst of affluence”
August 24, 2012, Gregory Carpenter, BTI Group Merges & Acquisitions, “How to buy a business”
August 31, 2012, Gregory Carpenter, BTI Group Merges & Acquisitions, “Preparing to sell a business”

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 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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
  • Saturdays at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton

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!

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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.

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See our free report, “Nonqualifed Stock Options – Executive Tax and Financial Planning Strategies” at http://www.stockoptionadvisors.com/non-q_stock

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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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