Michael Gray, CPA’s Option Alert #156
An irregular alert for issues relating to employee stock options
June 7, 2017
© 2017 by Michael Gray, CPA
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Table of Contents
- Michael Gray’s schedule
- June 15 is an estimated tax due date
- Foreign account reports due date has changed
- Live presentation by Michael Gray for tax professionals, lawyers and financial advisors.
- ESOP disqualified. Contributions exceeded compensation
- Some lifetime gift planning strategies for employer stock
- For our readers who are CPAs.
- 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
Michael Gray’s schedule
Michael Gray will be out of the office from June 14 through 16, and won’t be able to respond to emails or telephone calls on those days. He will return on Monday, June 19. Dawn Siemer will be out on vacation from June 26 to July 7.
June 15 is an estimated tax due date
The second estimated tax payment for most individuals and calendar year corporations and fiduciaries is June 15.
For individuals, federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2016 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 2017.
The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2016 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 2017.
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.
Foreign account reports due date has changed
As we have previously said in this newsletter, the due date for FinCEN 114, the report of foreign accounts for 2016 has changed. Although the official due date is April 18, 2017, FinCEN has granted taxpayers and automatic extension to October 16.
Live presentation by Michael Gray for tax professionals, lawyers and financial advisors.
Michael Gray, CPA will give a lunchtime presentation, “Estate Planning without an estate tax”, on June 20, 2017 for the Estate & Trusts discussion group, Silicon Valley San Jose Chapter, California Society of Certified Public Accountants (CalCPA.) Locatioin is Abbott, Stringham & Lynch, 1530 Meridian Ave., San Jose. This is an introductory-level presentation focusing on providing for the support of the family and key planning issues. The investment, including lunch, is $20 for CalCPA members and $30 for nonmembers. You can register here www.calcpa.org/events-and-programs/event-details?id=a795efd2-3325-43c6-8f6e-42e0137cf1db or call Susie Riffel at 650-522-3168.
ESOP disqualified. Contributions exceeded compensation.
The Eighth Circuit Court of Appeals affirmed the Tax Court’s ruling that an ESOP was disqualified. The ESOP made a contribution to a participant that had no compensation. Under Internal Revenue Code Section 415, a contribution to an ESOP to an employee’s account can’t exceed 100% of eligible compensation.
(DNA Pro Ventures Inc. ESOP v. Commissioner, 2017 USTC 50,221, May 9, 2017.)
Some lifetime gift planning strategies for employer stock
This is a reminder of some lifetime gift strategies. 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 in that case.
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, 2017, the applicable federal rate for a five-year loan with annual compounding of interest is 1.18%. (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 of 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.
For our readers who are CPAs
I’m developing an initiative just for CPAs in public practice and need your contact information. Please send an email to email@example.com or call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162. Just say “I’m a CPA in public accounting who reads your newsletter” and give your name, address, telephone number and email address. Thanks!
Please share your good experiences with Michael Gray, CPA
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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 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 May and June:
- June 2 and 9, Michael Jones, CPA, Thompson Jones, LLP, “Beneficiary designations for retirement accounts”
- June 16, Peggy Martin, CLU, ChFC, The Family Wealth Consulting Group, “Long-term care insurance”
- June 23 and 30, Peggy Martin, CLU, ChFC, The Family Wealth Consulting Group, “Life insurance basics”
- July 7 and 14, Scott Haislet, CPA and attorney at law, “Section 1031 exchanges”
- July 21, Scott Haislet, CPA and attorney at law, “Real estate reassessment change of ownership”
- July 28, Scott Haislet, CPA and attorney at law, “Sale of a principal residence”
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 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 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.
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.
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.)