Michael Gray, CPA’s Option Alert #153
An irregular alert for issues relating to employee stock options
February 10, 2017
© 2017 by Michael Gray, CPA
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Table of Contents
- Reminder – tax planning is even more uncertain for 2017!
- Have you received your tax preparation materials?
- Make your tax return preparation interview appointment now.
- Don’t report taxable income twice!
- Remember to report the sale of option stock.
- Watch reporting qualified sales of ISO stock.
- 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
Reminder – tax planning is even more uncertain for 2017!
Now that Donald Trump has been inaugurated as President of the United States, the tax picture is even more unclear than in previous years. Trump and the Republicans have many significant tax reform proposals, including the repeal of the alternative minimum tax and the disallowance of deductions for state income taxes. It seems unlikely that tax reform legislation will be passed until late this year or early in 2018. We might see staggered effective dates for many of the changes.
We’ll do the best we can to provide advice with our broken crystal ball. When it comes to stock options, economics must rule when making decisions.
Have you received your tax preparation materials?
If you haven’t received a tax data organizer or instructions to submit information using the Tax Notebook and want us to prepare your income tax returns, please call Dawn Siemer at 408-918-3162 on Monday, Wednesday or Friday.
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.
Don’t report taxable income twice!
A common error for employees who exercise employee stock options is to report their income twice. Ordinary income from exercising a non-qualified stock option or from the disqualified disposition of stock received from exercising an incentive stock option should be reported by the employer on Form W-2. The ordinary income amount is added to the tax basis (cost for computing gain and loss on your income tax return), reducing or eliminating the gain reported for the sale of the stock. Brokerage companies can also miss this adjustment on the information return for the sale. This is especially a common error for employees who skip the “interview mode” when preparing their own income tax returns using software like TurboTax.
Remember to report the sale of option stock.
Employees who exercise their stock options and immediately sell the stock sometimes omit reporting the sale of the stock. They figure the income is already reported on their W-2 form. They are essentially right, but the IRS “matches” the income reported on income tax returns with information returns for the sale of securities issued by brokerage companies. See the above information, “Don’t report taxable income twice!” If you add the option price to the ordinary income reported for the nonqualified stock option exercise or disqualified disposition of ISO stock resulting from an exercise and immediate sale, the cost should be equal to or slightly more (because of selling expenses) than the sales price of the stock.
Watch reporting qualified sales of ISO stock.
A common error for employees who make a qualified disposition of ISO stock is to add the AMT income reported for the year of exercise to the cost of the stock. (A qualified sale is made more than two years after the grant of the ISO and more than one year after the exercise of the ISO.) Employees rationalize they have already paid income taxes for that income. The tax they paid was on the alternative minimum tax schedule, not the regular tax schedule, so there is no regular tax basis adjustment for the exercise.
The mechanism for recouping some of the AMT paid when the ISO was exercised is the minimum tax credit, reported on Form 8801. A second AMT Schedule D is prepared for the year of sale with the basis adjustment added on the AMT Schedule D for the sale of the ISO stock.
Does this make your head spin? Maybe you should hire someone like us who understands this to prepare your income tax returns.
Please share your good experiences with Michael Gray, CPA.
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Financial Insider Weekly broadcast schedule for February and March.
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 February and March:
- 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”
- March 3 and 10, Martin Schainbaum, attorney at law, “I’m being audited by the IRS! Now what?”
- March 17, Martin Schainbaum, attorney at law, “Appealing your IRS audit”
- March 24 and 31, Martin Schainbaum, attorney at law, “I owe the IRS! Now what?”
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 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.
I have also started a blog at www.michaelgraycpa.com. Check it out!
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.)