Michael Gray, CPA’s Option Alert #125

An irregular alert for issues relating to employee stock options

July 7, 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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Pre-publication offer for Secrets of Tax Planning For Employee Stock Options, 2014 Edition expires soon!

I just finished an update of my book, Secrets of Tax Planning For Employee Stock Options, 2014 Edition. You can get a copy for half price if you order it by July 10, 2014. You can request information or call your order to Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162, or here is a web page with some details http://www.siliconvalleypublishingcompany.com/products/secrets-of-tax-planning-for-employee-stock-options-2014-edition/.

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The year is half over!

The year is flying by. How is yours going? Tax planning is best done earlier when you can do something about 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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Michael Gray will be out of the office part of July.

Michael Gray will be out of the office on July 28 and 29. Make your appointment now.

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Timing income can help reduce income taxes

Remember that higher tax rates apply based on adjusted gross income and taxable income thresholds.

For example, the 39.6% maximum federal income tax rate applies for married persons filing joint returns with taxable income exceeding $457,600 for 2014. The federal income tax rate for long-term capital gains also increases from 15% to 20% when taxable income exceeds that threshold. The threshold for singles is $406,750.

The 3.8% net investment income tax applies when adjusted gross income exceeds $250,000 for married persons filing joint returns. The threshold for singles is $200,000.

By spreading option exercises or stock sales over more than one year, a taxpayer might be able to substantially reduce the tax rates that apply. The best way to find out what rates apply is to make tax projections. A tax advisor can do it for you or you can do it yourself using tax projection software.

Don’t let the tax tail wag the dog. If you have options that are lapsing, including because of termination of employment, you might not have a choice except to exercise the options or lose the financial benefit of buying the stock at the option price.

Also, the stock may be highly volatile or you may have a “liquidity event” for stock that isn’t publicly traded. In those cases, you might want to “take the money and run!”

If you want our help in this planning process, call Dawn Siemer on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. Pacific Time to make an appointment.

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NQSO and certain stock appreciation rights not subject to current taxation as deferred compensation

Under Internal Revenue Code Section 457A, compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity, such as a foreign corporation, is includible in taxable gross income when there is no substantial risk of forfeiture of the rights to the compensation.

The IRS has ruled that nonqualified stock options that meet the requirements of Section 409A – the option price is at least the fair market value on the grant date – are not deferred compensation subject to Section 457A.

The stock appreciation rights addressed in the ruling were also to be settled in the stock of the issuing corporation. The IRS said that, in this case, the stock appreciation rights were equivalent to nonqualified stock options with a net exercise feature. Therefore, the rights were not deferred compensation.

The IRS made it clear that stock appreciation rights that would be settled in cash would be deferred compensation subject to Section 457A.

(Revenue Ruling 2014-18, June 10, 2014.)

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Deferred compensation that won’t be paid still subject to FICA tax

Louis Balestra, Jr. was a pilot for United Airline (United) from January 29, 1979 until he retired on October 1, 2004. When he retired, United withheld FICA (including Medicare) taxes based on a present value computation in the year of his retirement.

United’s liability for the deferred compensation was discharged in bankruptcy, so the majority of the compensation will never be paid.

Mr. Balestra applied for a refund of the taxes.

The U.S. Court of Federal Claims upheld the IRS in denying the refund. The Court said the Treasury Regulations requiring an actuarial computation of the present value of the future benefits were valid, despite the fact the benefits won’t in fact be paid.

(Balestra v. U.S., 2014-1 U.S.T.C. 50,303, May 31, 2014.)

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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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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.

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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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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 4, 2014, Mark Erickson, attorney at law, “How to work with a divorce attorney cost effectively”
July 11, 2014, Nancy J. Ross, divorce coach and mediator, Bauer, Shepherd & Ross and Associates, “How a collaborative approach can help make divorce a less painful process”
July 18, 2014, Bernard Vogel III, attorney at law, Silicon Valley Law Group, “Choices of forms for doing business”
July 25, 2014, Craig Martin, CFP®, The Family Wealth Consulting Group, “The role of emotions in investing”
August 1, 2014, Craig Martin, CFP®, The Family Wealth Consulting Group, “Using alternative investments to reduce risk”
August 8, 2014, Janis Carney, attorney at law, Carney, Sugai & Sudweeks LLP, “Life care planning”
August 15, 2014, Peggy Martin, CLU, ChFC, MSFC, FLMI, CASL, The Family Wealth Consulting Group, “Socially responsible & sustainable investing update”
August 22, 2014, Janis Carney, attorney at law, Carney, Sugai & Sudweeks LLP, “Veterans’ Administration benefits for long-term care”
August 29, 2014, Naomi Comfort, attorney at law, Silicon Valley Elder Law, TBA

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 Silicon Valley Publishing Company 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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