Michael Gray, CPA’s Option Alert #152
An irregular alert for issues relating to employee stock options
January 13, 2017
© 2017 by Michael Gray, CPA
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Table of Contents
- Tax preparation materials will soon be on the way
- Engagement letters will soon be mailed
- Make your tax return preparation interview appointment now
- IRS filing season starts January 23
- Fourth quarter estimated tax payment for non-corporate taxpayers due
- ‘Tis the season to exercise ISOs?
- 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
Tax preparation materials will soon be on the way
We are in the process of mailing instructions to our clients this week. 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 at 408-918-3162.
Engagement letters will soon be mailed
With Dawn’s vacation the last two weeks of December and anticipating a tax cut for 2017, we haven’t mailed our engagement letters yet. Your tax preparation materials have a higher priority, so expect to see engagement letters in a couple of weeks.
Make your tax return preparation interview appointment now
Most personal interview appointments for preparing 2016 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.
IRS filing season starts January 23
The IRS has announced that the 2017 filing season for individual income tax returns will start on January 23. Tax returns can’t be processed before that date. The IRS also issued a reminder that Congress has enacted a delay for issuing refunds for income tax returns that include an earned income tax credit or an additional child tax credit. Those refunds can’t be issued before February 15, and will probably not be issued until the week of February 27.
(IR-2017-01, January 5, 2017.)
Fourth quarter estimated tax payment for non-corporate taxpayers is due January 17
The final 2016 estimated tax payment for individuals and calendar-year estates and trusts is due January 17, 2017. (Thank the weekend and Martin Luther King’s birthday!) Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year’s facts.
If you miss the January 17 deadline, making a late estimated tax payment can stop penalties from accruing.
’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.”
If the company’s stock isn’t publicly traded and you can’t sell the shares, this strategy won’t work.
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.)
The incoming Trump administration and Republicans in Congress have pledged to repeal the alternative minimum tax. We don’t know how or when this would be effective. Exercising incentive stock options early can still give flexibility for working with tax changes adopted later in the year. There is also a proposal pending to postpone paying income taxes for the exercise of an employee stock option for a company whose stock isn’t publicly traded.
Tax Reform is almost certain to be passed during 2017, but the devil will be in the details. Stand by.
Please share your good experiences with Michael Gray, CPA.
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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 13, Don Pollard, CLU, ChFC, Advanced Professionals, “Health Insurance Update for Small Businesses”
- January 20 and 27, Peter Moss, Wymac Capital, “Residential mortgage market update”
- February 3 and 10, Mark Erickson, attorney at law, “California divorce basics”
- February 17, Mark Erickson, attorney at law, “California spousal and child support – Part 1 of 2”
- February 24, Mark Erickson, attorney at law, “California spousal and child support – Part 2 of 2”
Financial Insider Weekly is also broadcast as follows:
- Sundays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Sundays at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Sundays at 10:00 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Mondays at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Mondays at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Mondays 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
- Mondays 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
- Tuesdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Tuesdays 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
- Wednesdays 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
- Thursdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Fridays at 11:00 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola.
- Fridays at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
- Fridays at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
- Fridays at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, “public access TV”
- Fridays 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 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
- Saturdays at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
Past episodes are available at https://www.youtube.com/user/financialinsiderweek.
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 firstname.lastname@example.org.
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.
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Check out my blog.
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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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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)