Michael Gray, CPA’s Option Alert #170
An irregular alert for issues relating to employee stock options
July 10, 2018
© 2018 by Michael Gray, CPA
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Table of Contents
- The year is half over!
- It’s time for cleanup and extensions
- My schedule
- Special offers for updates of two of my books
- Do you love travel?
- Do you love Disney?
- Equity compensation isn’t subject to Railroad Retirement Tax
- Should you consider using a Grantor Retained Annuity Trust to shift appreciation to other family members?
- Please share your good experiences with Michael Gray, CPA
- Financial Insider Weekly past episodes
- Follow me on social media!
- Check out my blog
- Interested in our other newsletters?
- Consult with a tax advisor
The year is half over!
Time is sneaking by us again! How is 2018 going for you? Is there any way we can help you reach your goals? How is your tax picture shaping up this year? Call Thi Nguyen, CPA at 408-286-7400, extension 206 to make a planning appointment now.
It’s time for cleanup and extensions
Maybe you have an issue for which you would like a second look on the income tax returns you just filed. Maybe you have extended income tax returns that you need to have prepared. Or maybe you have some planning issues for which you need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.
I (Michael Gray) will be away from my office after July 10, returning on July 16.
Special offers for updates of two of my books.
We have been hard at work getting our books updated for the Tax Cuts and Jobs Act of 2017, enacted last December and mostly effective at the beginning of 2018. Two books are now ready for you to order, and we are making them available to our subscribers for half price through July 31, 2018. They are the 2018 editions of Executive Tax Planning for Employee Stock Options at https://bit.ly/2KqJHfE and How to Use Roth and IRA Accounts to Build A Secure Retirement at https://bit.ly/2lQKk3q. Each of the books are priced the same at $14.99 plus $5.00 shipping and $1.85 California sales tax for California residents. Follow the links above to buy online using the coupon codes ESO2018 and ROTH2018, or call in your order to Dawn Siemer weekdays at 408-918-3162.
Do you love travel?
I have created a Facebook travel group, called Travel Adventures, for members to share travel photos, experiences and tips. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/207423476536726/, or search “Groups” on Facebook. You have to use the “join” button to join the group. This is a closed group, and I will approve your membership.
Do you love Disney?
I have created a Facebook group, called Disney Magic, for members to share Disney photos, experiences and tips. I am also posting developments for Disney films, television shows, and amusement parks there. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/2006739209578437/, or search “Groups” on Facebook. You have to use the “join” button to join the group. This is a closed group, and I will approve your membership.
Equity compensation isn’t subject to Railroad Retirement Tax
The U.S. Supreme Court resolved a conflict of interpretation about whether employee stock options are subject to Railroad Retirement Tax.
The Court ruled that equity compensation isn’t subject to the Railroad Retirement Tax.
The retirement system for the railroad industry was nationalized by the Railroad Retirement Act of 1937. Railroad employers pay taxes on employee compensation, somewhat like the Social Security system.
Under the Railroad Retirement Act, the tax applies to “any form of money remuneration.”
The IRS claimed that stock options should be considered to be “money remuneration.”
The Supreme Court said that money is understood to be currency issued by a recognized authority as a medium of exchange. While stock can be bought or sold for money, it isn’t usually considered to be a medium of exchange.
(Wisconsin Central Ltd. et al v. United States, U.S. Supreme Court decision # 17-530, June 21, 2018.)
Should you consider using a Grantor Retained Annuity Trust to shift appreciation to other family members?
With today’s estate tax rules, a married couple can leave close to $11 million to their heirs without being subject to the federal estate tax. (The Trump administration has proposed repealing the estate tax. The following strategy is also a method of shifting income to family members in lower income tax brackets.)
Some public offerings result in stock for which the owners made a minimal investment becoming enormously valuable, far surpassing $11 million. Employees and shareholders holding stock with that potential should consider estate planning strategies to shift the increase in value to other beneficiaries.
I described some ways to do that in the last newsletter.
Another strategy where the stock holder doesn’t have to give the total investment away is a “grantor retained annuity trust” or GRAT.
One form of this strategy is called a “zero-out” GRAT, often for a short term, like two years.
In this case, an “annuity” just means a regular payment, and can be thought of as a note with equal payments made at least annually. Stock is transferred to an irrevocable (can’t be changed) trust in exchange for an annuity with an equivalent value to the stock transferred. Since an equivalent value is received in the exchange, the amount of the gift is zero.
This exchange should still be reported on a gift tax return in order to have the statute of limitations run on the transaction.
The remainder of the trust after the annuity is paid is distributed to other named beneficiaries, with the grantor’s tax basis and holding period.
When the stock isn’t publicly traded, it must be appraised. If cash isn’t generated to make the annuity payments, they can be made in property, such as a return of the stock. Another appraisal will have to be done when the payments are made when they are made with stock.
For income tax purposes, the person who created the trust, called the “grantor,” is treated as the owner of the trust. Any income or deductions of the trust will be reported on the grantor’s income tax return.
If the grantor dies before the annuity is paid, the present value of any unpaid annuity payments is included in the grantor’s taxable estate.
To avoid estate inclusion, GRATs are often made for short terms, and multiple GRATs may be set up with different maturity dates, or “rolling GRATs.”
Short-term GRATs are a target for tax reform. A minimum of a 10-year term for GRATs has been proposed. This would increase the risk the grantor could become subject to income tax if the company is acquired before the term of the trust expires, and that some or all of the GRAT could be included in the grantor’s taxable estate.
This is a greatly simplified explanation. There are many alternative structures for GRATs. Be sure to get good professional advice when creating and operating a GRAT.
IRS issues draft “postcard” Form 1040.
The IRS has issued a draft Form 1040 for 2018. The form eliminates a lot of information historically shown and moves it to schedules attached to the form. The form may be fulfilling a “political promise,” but won’t really simplify the tax reporting process. I’m afraid it will confuse many taxpayers.
Please share your good experiences with Michael Gray, CPA.
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Financial Insider Weekly past episodes
After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Past episodes are available at https://www.youtube.com/user/financialinsiderweek.
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 Social Media!
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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.)