Michael Gray, CPA’s Option Alert #140
An irregular alert for issues relating to employee stock options
December 17, 2015
© 2015 by Michael Gray, CPA
(If you find this information valuable, please pass it on to a colleague!)
Table of Contents
- Happy holidays!
- Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15
- Should you make additional tax payments before December 31?
- Should you donate appreciated publicly traded stock?
- Donating a car to charity?
- Consider the California College Access Credit
- IRS audits of individuals are way down
- Final reminder! If you exercised ISOs during 2015, should you use the “escape hatch”?
- Congress planning to restore expired tax breaks
- Does your group need a speaker?
- Please share your good experiences with Michael Gray, CPA
- Financial Insider Weekly broadcast schedule
- Question and answer
- How is the 15% discount on ESPP shares reported?
- Follow me on social media!
- Check out my blog
- Do you know about our other newsletters?
- Consult with your tax advisor
Happy holidays! Michael Gray’s schedule
Have a happy and safe holiday season.
Michael Gray will be out of the office December 17 and 18, and after December 23, returning January 4.
Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.
The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2016. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year’s facts.
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.
This situation has changed somewhat because of the 3.8% net investment income (NII) tax. Part of the state tax payment may be a “good” deduction for the NII tax even though there is no AMT benefit. See your tax advisor.
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.) There is an exception to the rule for vehicles donated to a charity. If the charity sells the car, the taxpayer may rely on the sales price disclosed on Form 1098-C. The original Form 1098-C is submitted to the IRS with your income tax return (or otherwise sent to the IRS with Form 8453 if you efile).
Consider the California College Access Credit
California allows a tax credit of 55% of contributions to the College Access Tax Credit Fund. The Fund provides money for Cal Grants for college education of students in California. A federal charitable contribution deduction is also allowed for contributions to the Fund. There is a “reservation” procedure, so you should apply right away. You can get more information and make contributions online at www.treasurer.ca.gov/cefa/catc/.
IRS audits of individuals are way down
Thanks to reduced funding to the IRS by Congress, the audit rate for individual tax returns has declined from 291,000 field audits in fiscal year 2014 to 267,000 in fiscal year 2015. The number of correspondence audits increased from 951,000 for fiscal year 2014 to 961,000 for fiscal year 2015. The revenue from examinations fell from $12.5 billion for fiscal year 2014 to $7.3 billion for fiscal year 2015.
Congress is making a serious mistake. The easiest way to raise revenue without increasing income tax rates is to simply enforce the tax laws.
Final reminder! – If you exercised ISOs during 2015, should you use the “escape hatch”?
Remember if you exercised ISOs during 2014 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, 2015. The fair market value of the shares on March 1, 2015 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, 2015 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, 2015, 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.
If you are going to use this “escape hatch” strategy, I suggest not waiting until the last minute. One of my clients was thinking of doing this, and an employee unexpectedly sued the company for an employment-related matter. The company’s stock was locked up for employees because of the lawsuit. My client wasn’t able to use the “escape hatch” strategy.
Congress planning to restore expired tax breaks
There are many tax breaks that expired at the end of 2014, such as the state sales tax deduction, the $100,000 exclusion allowance for charitable transfers from IRAs to charities by taxpayers over age 70 ½, and the deduction for teacher’s supplies. The breaks for businesses are more significant, such as 50% bonus depreciation and a larger expense allowance.
Most of these items aren’t significant for readers of this newsletter.
Congress is currently working on passing budget legislation that will extend the expired tax breaks for at least two years through 2016.
Does your group need a speaker?
We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as “How I created a public access television show broadcast on eleven Bay Area stations.” To make arrangements, call Michael Gray at 408-918-3161.
Please share your good experiences with Michael Gray, CPA.
As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm<. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.
Financial Insider Weekly broadcast schedule for December and January
Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 18, 2015, G. Scott Haislet, CPA and attorney at law, “Sale of a principal residence”
- December 25, 2015, Don Pollard, CLU, ChFC, Advanced Professionals, “Medical insurance for individuals”
- January 1, 2016, Don Pollard, CLU, ChFC, Advanced Professionals, “Medical insurance for small businesses update”
- January 8, 2016, Craig Martin, CFP®, The Family Wealth Consulting Group, “Alternative investments besides stocks and bonds”
- January 15, 2016, Craig Martin, CFP®, The Family Wealth Consulting Group, “Investing in turbulent times”
- January 22 and 29, 2016, Peggy Martin, ChFC, CLU, “Socially responsible and sustainable investing”
Financial Insider Weekly is also broadcast as follows:
- Sunday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Sunday at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Monday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
- Monday at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
- Monday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Tuesday at 10:30 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Tuesday at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Tuesday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill
- Wednesday 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
- Thursday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Friday at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
- Friday at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
- 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
- Saturday 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
- Saturday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Saturday at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
Broadcast on the internet at the same time as streaming video at www.mhat.tv
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!
Question and answer
Are employers required to disclose the 15% discount on purchase of ESPP shares on employee W-2s? The broker who handles the ESPP will be sending out 1099-Bs showing the short term reportable gain. So, I feel like reporting the
15% discount as ordinary income on the employees W-2 will be double
reporting the same amount and may cause employee to pay twice on this.
Have you considered getting a copy of one of my books about stock options? www.siliconvalleypublishingcompany.com or Amazon.
I’ve also covered this issue before in this newsletter.
Whether the gain is short-term or long-term depends on the holding period for the stock. If the stock is held more than one year, any capital gain will be long-term.
The 15% discount for an ESPP is ordinary income when the stock is sold in a qualified sale – more than two years after subscription date and more than one year after purchase. (Actually the lesser of the 15% discount based on the fair market value on the subscription date or the gain on the sale.)
For a disqualified disposition, the ordinary income is the excess of the fair market value on the purchase date over the cost.
The ordinary income is added to the cost of the stock when reporting the sale on Form 8949 and Schedule D.
Employers usually include the ordinary income for disqualified disposition in W-2 income. They are inconsistent on reporting the ordinary income for qualified dispositions. If the ordinary income for a qualified disposition isn’t included in W-2 income, it should be separately reported as “other income.”
If a decedent is holding ESPP stock at the date of death, the ordinary income should be reported on the decedent’s final income tax return.
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.
See the books mentioned at www.employeestockoptionsecrets.com or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at www.stockoptionadvisors.com/nqsorequest.
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Do you know about our other newsletters?
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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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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)