Michael Gray, CPA’s Option Alert #134

An irregular alert for issues relating to employee stock options

June 5, 2015
© 2015 by Michael Gray, CPA
ISSN 1931-2768

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

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Second quarter estimated tax deadline is June 15

The second estimated tax due date for calendar-year taxpayers is June 15. Federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2014 tax on your income tax return if your adjusted gross income exceeds $150,000. Alternatively, you can make payments based on your income and deductions for 2015.

The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2014 tax, unless your adjusted gross income is $1 million or more. In that case, your estimated tax payments should be based on your actual income and deductions for 2015.

If you want our help computing your second quarter estimated tax payments, call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment for a consultation.

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Foreign account reports are due June 30

The due date for FinCEN 114, the report of foreign accounts for 2014, is June 30, 2015. It applies for foreign bank and brokerage accounts and certain other financial accounts exceeding $10,000 at any time during 2014 owned by the taxpayer or for which the taxpayer had signature authority. The form must be efiled. If you have any questions about this form, consult with your professional tax advisor.

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Michael Gray out of office

Michael Gray will be out of the office June 10 through 12, returning June 15.

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Michael Gray gives a LIVE seminar presentation for tax professionals

Michael Gray will present Part 2 of a two-part series of lunchtime presentations of a “Survey of lifetime gift planning and Form 709” for the Estate & Trust Group, Silicon Valley San Jose chapter of CalCPA. The presentation will be from noon to 1:30 p.m. on Thursday, June 18 at Abbott Stringham & Lynch, 1550 Leigh Ave. in San Jose. Lunch is included. The investment with an advance reservation is $20 for CalCPA members and $30 for nonmembers.

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Some lifetime gift planning strategies for employer stock, Part 1

As you can see above, I’m giving a presentation on June 18 about lifetime gift strategies and gift tax return preparation, so I decided to highlight a few items here. See your estate planning attorney and tax advisor for details. Remember that reporting transactions on a gift tax return may apply. Also, tax laws vary among the states. For example, California doesn’t have a gift tax, but other states do.

First, get your house in order. If you don’t have a will and trust, get them in place. Should you increase your life insurance coverage? Who will care for your children and how your family will be provided for if something happens to you and/or your spouse is more important than other estate planning concerns.

Also, provide for your own needs first. It doesn’t make sense to give your assets away and leave yourself financially destitute. (Medicare planning is another matter. Your parents or grandparents might need to consult with an Elder Law attorney about that.) Most clients that I work with already have plans for the money they will receive from employee stock options, including using it as a down payment for a home. No fancy estate planning required.

The estate planning picture has dramatically changed during the past few years. The combined estate tax exclusion for a married couple is approaching $11 million. With the “portability election,” the exclusion for the last-deceased spouse now carries to the surviving spouse. You don’t have to create a “bypass” or “credit shelter” trust in order to preserve an estate tax exclusion, but you still might want to.

With the high lifetime exclusion plus $14,000 per donor, per donee annual exclusion, significant transfers can be made with zero out of pocket tax cost. (Transfers to some trusts may not qualify for the gift tax annual exclusion.)

For most taxpayers, the focus has changed to income tax planning. When a taxpayer dies, the tax basis for most assets (cost for reporting gain or loss when an asset is sold) is adjusted to the fair market value at the date of death. That means most people will not be concerned with shifting assets or appreciation to avoid gift and estate taxes. There can still be income tax benefits for shifting gains to family members in low income tax brackets. (But watch out for the “Kiddie Tax” that can apply to children up to age 23! The child is taxed at the parents’ marginal tax bracket.)

The simplest way to shift appreciation to a family member is by making a loan. The loan should be documented with a written note. The IRS specifies “applicable federal rates” for the minimum interest to be charged on loans. For June, 2015, the applicable federal rate for a five-year loan with annual compounding of interest is 1.59%. (It will increase when the Federal Reserve raises the discount rate.) The borrower can invest the loan proceeds into stock (or another investment) that will hopefully appreciate more than the interest amount. The risk is the investment can go down in value.

Another fairly simple way to shift appreciation to a family member is with an installment sale. The installment note must bear interest of at least the applicable federal rate. Founder’s stock could be sold to a family member. If the stock isn’t publicly traded or the stock value goes down, the family member may find it hard to pay off the loan on time. If the value of the stock goes up and there is a liquidation event before the due date of the note, the family member wins. The eventual sale of the stock may result in long-term capital gains in a lower tax bracket. The appreciation will be excluded from the selling taxpayer’s taxable estate. If the stock isn’t publicly traded, an appraisal will probably have to be done to establish the sale was made for fair market value. Appraisals are expensive, so the transaction should be sizable enough to justify the expense. It’s also a good idea to report installment sales to family members on a gift tax return so the statute of limitations will run and the IRS won’t be able to re-examine the transaction more than three years after the gift tax return is filed.

For the last two strategies, the transferor gets his or her principal back, plus some interest. The next simple strategy is to make an outright gift of stock or an appreciating asset. When an asset is expected to appreciate rapidly, it can make sense to transfer it to a family member at a current low value and avoid having the appreciation in your estate. I have had clients transfer millions of dollars in appreciation to their children and other family members by making gifts of start-up stock or other appreciating investments. Be aware that a transfer of ISO stock can be a disqualified disposition, resulting in taxable ordinary income. For stock that isn’t publicly traded, an appraisal will be required. Again, to get the statute of limitations running, even gifts of stock of less than $14,000 per donor, per donee should be reported on a gift tax return. Also, there may be legal issues relating to transferring stock that isn’t publicly traded. You will probably have to get the consent of the company that issued the stock. Get legal counsel.

Now you have three simple strategies for transferring appreciation to other family members. Always get tax advice when you implement them.

I’ll write about more complex strategies in future newsletters.

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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 June and July.

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 June and July:

June 5, 2015, Tom W. Anderson, President, Retirement Industry Trust Association, “Making alternative investments besides real estate using a Roth or IRA account”
June 12 and 19, 2015, Don Pollard, CLU, ChFC, Advanced Professionals, “Health care plans for small businesses update”
June 26, 2015, Michael Desmarais, attorney at law, “Your rights as a beneficiary”
July 3, 2015, Michael Desmarais, attorney at law, “Your rights as a beneficiary”
July 11 and 18, 2015, Jeffrey Hare, APC, attorney at law, “Settling legal disputes our of court”
July 25, 2015, Lori Greymont, CEO, Summit Assets Group, “Real estate investment alternatives”

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
  • 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
  • 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

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-editionor 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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