An irregular alert for issues relating to employee stock options

Michael Gray, CPA’s Option Alert #120

January 10, 2014
© 2014 by Michael Gray, CPA
ISSN 1931-2768
(If you find this information valuable, please pass it on to a colleague!)

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Reminder to employees with stock options! Michael Gray will give a LIVE lunchtime seminar on January 16

Michael Gray, CPA will give a lunchtime seminar on Thursday, January 16, for employees with stock options. The title of the seminar is “Executive Tax Planning For Employee Stock Options”. The investment is $97 per person, and includes a copy of the book by the same name. The seminar will be located at the Three Flames restaurant at 1547 Meridian Ave. in San Jose, California. Lunch is included. Reservations are required. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays no later than January 13, 2013. For more information, visit http://www.stockoptionadvisors.com/jan2014seminar.shtml.

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Reminder to employees with stock options! Michael Gray will give a LIVE telephone seminar on January 17

For those who can’t come to the in person seminar on January 16, Michael Gray will give a telephone seminar covering the same information, “Executive Tax Planning For Employee Stock Options”, at 1 p.m. Pacific Time. The investment is $97 per person plus any telephone long distance charges (not a collect call nor 800#), and includes a copy of the book by the same name. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays for reservations no later than January 13, 2013. For more information, visit http://www.stockoptionadvisors.com/jan2014teleseminar.shtml.

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Tax preparation materials will soon be on the way

We are mailing instructions to our clients this week and next. If we prepared your tax returns last year and you haven’t received instructions by January 20 or you would otherwise like to receive instructions, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Make your tax return preparation interview appointment now

Most personal interview appointments for preparing 2013 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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More extensions are likely for 2013 income tax returns

The IRS has issued final regulations for the 3.8% net investment income tax, but still hasn’t issued Form 8960 and instructions for reporting the tax. They are also behind the usual schedule for being able to accept electronically filed income tax returns (accepting January 31, 2014 instead of January 21) because of the recent shutdown from the federal government sequester.

Consequently, we think it’s likely there will be more extensions of time to file for high-income taxpayers for the 2013 tax year. Please don’t let that delay you from sending the information to prepare your income tax returns to us as soon as possible. That would create a real logjam on April 15.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to employee stock options, 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.

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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, 2014. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year’s facts. California passed a retroactive tax increase in the last election. There is no penalty for not paying the additional tax with your 2013 estimated tax payments, but you might want to do it for a deduction on your 2013 federal income tax return. Watch the alternative minimum tax. See your tax advisor.

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‘Tis the season to exercise ISOs?

Since stock received from exercising an incentive stock option has to meet two holding period tests (more than two years after grant and more than one year after exercise) to avoid having the excess of the fair market value over the option price taxed as ordinary income, exercising early in the year can be advantageous when you decide to hold the stock after exercise. The reason is you have the alternative of selling the stock before the end of the year of exercise and possibly avoiding the alternative minimum tax if the value of the stock drops after exercise. I call this tax strategy the “escape hatch.”

Be careful about blackouts. I have had some individuals call me who wanted to use the escape hatch during December, only to discover they were prohibited from selling their shares because they were subject to an employee blackout. Sometimes blackouts can happen unexpectedly, like when an employer becomes a party to a lawsuit. There’s no magic solution in these cases – you could be stuck with a significant tax liability.

For many people, the exercise and immediate sale of the shares is the most comfortable alternative, even if the tax bill is higher.

Also remember the wash sale rules can spoil an “escape hatch” transaction. You can’t repurchase the shares or even receive an employee stock option or buy a put option during the period starting 30 days before the sale to 30 days after the sale.

Another advantage of an exercise early in the year is to be able to meet the holding period requirements and sell the shares before the tax is due on April 15. But check the estimated tax payment requirements to avoid penalties for late estimated tax payments. (The alternative minimum tax liability can also be payable as an estimated tax liability.)

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The tax planning environment for employee stock options has changed

The adoption of the 3.8% surtax on net investment income and higher maximum tax rates for ordinary income and long-term capital gains has made planning for employee stock options more complex.

Creating more taxable income through an exercise of a stock option or a sale of stock can throw a taxpayer over one or more of several thresholds. For example, the threshold for the maximum 39.6% tax on ordinary income applies for 2014 when taxable income exceeds $457,600 for married persons filing joint returns and $406,750 for single persons. Certain itemized deductions will phase out when adjusted gross income exceeds $305,050 for married filing joint returns and $254,200 for single persons. The 3.8% surtax on net investment income applies when modified adjusted gross income exceeds $250,000 for married filing joint returns and $200,000 for single persons.

Ordinary income from the disqualified disposition of ISO stock isn’t subject to the Medicare payroll tax and also isn’t subject to the 3.8% surtax on net investment income.

Long-term capital gains from a qualified disposition of ISO stock and a qualified disposition of ESPP stock is investment income and can be subject to the 3.8% surtax on net investment income.

The 3.8% surtax on net investment income can’t be offset by the minimum tax credit.

These new “minefields” in the federal tax laws suggest that adjustments should be considered to tax planning strategies of the past, including staging exercises of options and sales of stock to avoid exceeding the thresholds when appropriate.

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Community public access television needs our help

As you can see below, 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.

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Financial Insider Weekly broadcast schedule for January and February.

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 January and February:

January 3, 2014, Don Pollard, CLU, Advanced Professionals, “How Health Care Reform is progressing for individuals”
January 10, 2014, Hilary Martin, CFP®, The Family Wealth Consulting Group, “Planned saving to reach your financial goals”
January 17, 2014, Lori Greymont, CEO, Summit Assets Group, “Residential real estate investing in Atlanta, Georgia and Birmingham, Alabama”
January 24, 2014, Lori Greymont, CEO, Summit Assets Group, “Different ways to invest in real estate”
January 31, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, “Charitable remainder trusts”
February 7, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, “Estate tax planning for retirement accounts”
February 14, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, “Handling retirement accounts after a death”
February 21, 2014, Professor Patricia Cain, Santa Clara University School of Law, “Tax issues for same sex couples”
February 28, 2014, David Howard, attorney at law, Hoge, Fenton Jones & Appel, “Tax reporting of foreign bank and investment accounts for individuals”

Financial Insider Weekly is also broadcast as follows:

  • Monday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Monday at 4:00 p.m. and 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
  • Mondays 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
  • Tuesdays 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 4:00 p.m. and 7:00 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
  • Wednesdays at 6:00 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • 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
  • Fridays at 2 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • 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
  • 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
  • Saturdays at 1 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County

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 answer emails personally. He will answer selected questions in this newsletter. Email your questions to mgray@stockoptionadvisors.com.

See the books mentioned at http://http://www.siliconvalleypublishingcompany.com/products/secrets-of-tax-planning-for-employee-stock-options-2014-edition or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at http://www.stockoptionadvisors.com/non-q_stock.shtml.

Also, consider attending our in person or online seminars about Tax Planning for Employee Stock Options on January 16 or 17, 2014, mentioned earlier in this newsletter.

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Follow me on social media!

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, www.linkedin.com/in/michaelgraycpa, and Google+.

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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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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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