Michael Gray, CPA’s Option Alert #151
An irregular alert for issues relating to employee stock options
November 14, 2016
© 2016 by Michael Gray, CPA
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Table of Contents
- Attention employees with stock options! Michael Gray will give a LIVE lunchtime seminar on December 8
- The Trump presidency and taxes
- IRS consents to revoking Section 83(b) elections
- If you exercised ISOs during 2016, should you use the “escape hatch”?
- Year end planning–should you “harvest” losses before the year end?
- Does your group need a speaker?
- Please share your good experiences with Michael Gray, CPA
- Financial Insider Weekly broadcast schedule
- Follow me on social media!
- Check out my blog
- Interested in our other newsletters?
- Consult with a tax advisor
Attention employees with stock options! Michael Gray will give a LIVE lunchtime seminar on December 8
Michael Gray, CPA will give a lunchtime seminar on Thursday, December 8 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 Luigi’s Pizza & Pasta, 2495 Winchester Blvd., in Campbell, California. Lunch is included. Reservations are required and there is limited seating. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays no later than December 6. Here is a link to more information: www.stockoptionadvisors.com/notwp/seminar16-12-8.pdf.
The Trump presidency and taxes.
We sent a separate summary of the Trump tax proposals to our subscribers last Friday. If you didn’t receive it and would like a copy, please call Dawn Siemer at 408-918-3162 or send her an email request at firstname.lastname@example.org.
Some of the significant tax proposals relating to employee stock options are (1) reducing the maximum individual income tax rate from 39.6% to 33%; (2) repealing the 3.8% net investment income tax; (3) increasing the standard deduction to $30,000 for joint filers and $15,000 for singles; and (4) repealing the alternative minimum tax. Remember these are only proposals and must be passed by Congress to be effective. The bottom line is to expect a major tax cut for 2017.
With the reduction of the maximum tax rate, it appears it would be advantageous to postpone recognizing taxable income, including waiting to exercise nonqualified stock options, until next year.
With the elimination of the net investment income tax, it appears it would be advantageous to wait until next year to realize net capital gains.
With the increase of the standard deduction, it appears it would be advantageous to accelerate itemized deductions, including state income tax payments for 2016 and charitable contributions, before the year end of 2016. Watch the alternative minimum tax for 2016, which can eliminate the tax benefit of the deductions, and the phase out of itemized deductions for high-income taxpayers.
With the elimination of the alternative minimum tax for 2017 together with the elimination of the net investment income tax, the tax benefits of incentive stock options from before 1986 would be restored, and planning for them would be greatly simplified. (There was an add-on minimum tax before 1986, which isn’t on the list of Trump proposals.)
If the proposals are enacted, I would recommend accelerating income and taking long-term capital gains from 2017 through 2021. It’s possible Trump might not be reelected and the changes could be modified or repealed.
If the Trump tax proposals are enacted, it would be the most significant tax reform legislation since the Tax Reform Act of 1986. Since they would generate significant deficits, it’s likely there will be some negotiation and compromise before they are enacted by Congress.
IRS consents to revoking Section 83(b) elections.
The general rule when exercising an unvested nonqualified stock option is the income isn’t recognized until the option vests. When a taxpayer makes a Section 83(b) election, the option is treated as vested for income tax reporting and the income is recognized on the date the option is exercised.
The Section 83(b) election must be made within 30 days after a nonqualifed stock option is exercised. It can only be revoked with the consent of the IRS.
The IRS has stated in Revenue Procedure 2006-31 that it will generally consent to a request to revoke a Section 83(b) election when the request is filed on or before the due date for making the election.
The IRS recently consented to three requests to revoke Section 83(b) elections that were filed before the due date for making the election.
(Letter Rulings 201644015, 201644016, 201644017.)
If you exercised ISOs during 2016, should you use the “escape hatch”?
Remember if you exercised ISOs during 2016 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, 2016. The fair market value of the shares on March 1, 2016 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, 2016 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, 2016, 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.
Year end planning – should you “harvest” losses before the year end?
The stock market has been very active this year. If you have sold securities (or other assets) for capital gains, review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.
Remember the wash sale rules. If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.
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.
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Financial Insider Weekly broadcast schedule for November and December.
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 October and November:
- November 18 and 25, Rebecca Dupras, Esq., Silicon Valley Community Foundation, “Why and how to promote charitable giving in your family”
- December 2 and 9, 2016, William D. Mahan, attorney at law, “Why you need a will”
- December 16, 2016, William D. Mahan, attorney at law, “Tax considerations of title”
- December 23 and 30, 2016, Phil Price, EA, The Price Company, “Qualified retirement plans for small businesses”
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 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!
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/non-q_stock.shtml.
Follow me on Twitter, Facebook or LinkedIn!
If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.
Check out my blog.
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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.
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.)