Michael Gray, CPA’s Option Alert #123

An irregular alert for issues relating to employee stock options

May 5, 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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Do you need help with your extended 2013 income tax returns?

The extended due date for calendar year business income tax returns is September 15 and the extended due date for calendar year individual income tax returns is October 15. We are already hard at work for these tax returns for many of our clients and we would welcome more. May we be of service with your extended returns? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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The earlier you do tax planning, the better.

Many people wait until the year-end for tax planning, but it’s better to do it earlier in the year when it’s easier to act on it. Why not make a tax planning appointment today? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Should you be making or planning a nonqualified deferred compensation election?

The tax picture for high-income taxpayers has changed substantially from just a few years ago. The maximum stated federal tax rate has increased from 35% to 39.6%. With the 3.8% tax on net investment income, the total is 43.4%. The effective tax rate is also increased for the phase out of itemized deductions and personal exemptions.

The tax rate has also dramatically increased for long-term capital gains when a taxpayer is in a high income bracket. The federal rate has increased from 15% to 20% plus the 3.8% net investment income tax, or 23.8%. That’s a 58.7% increase!

In California, the maximum tax rate has increased from 9.3% + 1% mental health tax = 10.3% to 12.3% + 1% mental health tax = 13.3%.

These changes create an environment favoring tax deferral strategies.

Employees should first make the maximum use of qualified pension, profit sharing and 401(k) plans, but most companies with high income service providers have found using qualified pension and profit sharing plans to be too restricted. You can’t discriminate in favor of highly-compensated employees.

An alternative that will become more popular is nonqualified deferred compensation plans.

Under these plans, the employee elects to not currently receive part of his or her compensation. It can be paid at a specified date, after termination, in an unforeseen emergency, or if the employee becomes disabled. The plan must be in writing and when the compensation will be paid must be defined in the agreement. There is little discretion about when the compensation will be paid. The liability for the deferred compensation must be a general obligation of the employer, so the employee has a risk of losing the compensation if the employer becomes bankrupt. The employer doesn’t receive a tax deduction until the compensation is paid, but the deferred compensation is subject to employment taxes.

These plans have become much more restricted with the enactment of Internal Revenue Code Section 409A. I call them “qualified nonqualified deferred compensation plans.” This is not a do- it-yourself project. The plan should be adopted and implemented under the guidance of qualified legal counsel.

Notably, the ordinary income from the exercise of a stock option can’t be further deferred under one of these plans, so you have to focus on other employee compensation.

The election to defer general compensation must be made in writing before the close of the preceding tax year, and is only effective for services performed after the election is made. The election deadline is based on the service provider’s tax year. New employees may make the election within 30 days after the participant becomes eligible to participate.

The election for performance-based compensation can be made no later than six months before the end of the period, so a deferred compensation election is still possible for 2014. Performance-based compensation is contingent on attaining goals on pre-established organizational or individual performance criteria relating to a performance period of at least 12 consecutive months during which the service provider provides services. The performance criteria must be stated in writing no later than 90 days after the commencement of the period of service to which the criteria are established. The service provider can’t have achieved the goal before making the deferral election.

How a nonqualified deferred compensation plan works can be further restricted in the plan document, so study it carefully before agreeing to participate.

By deferring compensation, the employee can earn additional income from the investment of the funds. When the income is ultimately paid, the employee may be in a lower tax bracket after termination or retirement.

This article is only an introduction to this subject. You should consult with tax, legal and financial counsel when making a decision to participate or when designing a nonqualified deferred compensation plan.

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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+.

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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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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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Broadcast times change for Financial Insider Weekly in Santa Cruz County, Watsonville & Capitola.

The broadcast days and times for Financial Insider Weekly have changed to Sunday at 1 p.m. and Tuesday at 10:30 a.m. The show is broadcast on Comcast channel 26 in Santa Cruz County and Charter Communications Channel 2 in Watsonville and Capitola.

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Financial Insider Weekly broadcast schedule for May and June.

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 May and June:

May 9, 2014, attorney Jeffrey B. Hare, P.C., “Legal due diligence for real estate transactions”
May 16, 2014, Phil Price, E.A., The Price Company, “Retirement plan alternatives for small businesses”
May 23, 2014, Mayuri Onerheim, “Money, Spirituality, Consciousness”
May 30, 2014, attorney Michael Desmarais, “Your rights as a beneficiary”
June 6, 2014, attorney Michael Desmarais, “Estate planning for second marriages”
June 13, 2014, attorney Jann Besson of Law Offices of Besson & Yarbrough, “Medi-CAL benefits for Long-Term Care”
June 20, 2014, Hilary Martin Hendershott, CFP®, The Family Wealth Consulting Group, “Why most people will never achieve their financial goals”
June 27, 2014, Craig Martin, CFP®, The Family Wealth Consulting Group, “The role of emotions in investing”

Financial Insider Weekly is also broadcast as follows:

    • 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 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
    • 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 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

  • 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
  • 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 1:00 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.

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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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