Michael Gray, CPA’s Option Alert #171

An irregular alert for issues relating to employee stock options

September 7, 2018

© 2018 by Michael Gray, CPA

ISSN 1931-2768

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Estimated tax payment due September 15.

Federal estimated tax payments for individuals are due September 15. There is no California estimated tax payment due September 15 because estimate payments for April and June are “front loaded.”

The federal estimated tax payment can be based on the income tax reported on the 2017 federal income tax return. If the 2017 federal adjusted gross income was more than $150,000 (or $75,000 if married filing separately), the payment can be based on 110% of the income tax on the 2017 federal income tax return. Alternatively, the payment can be based on 90% of the actual tax for 2018. Although the tax payment is 25% of the annual tax liability, the computations can be made using income and deductions through August 31. (The computations for the tax law changes for 2018 are so complex that I recommend using the “protected estimate” based on 2017 tax approach.)

With the tax law changes for 2018, you might want to get professional help with your estimated tax payments this year.

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Individual and C corporation tax returns due October 15.

The due date for 2017 individuals and calendar year corporations for which timely extensions were filed is October 15, 2018.

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Last chance to “undo” a Roth conversion.

You can still change your mind for a 2017 conversion of a regular IRA to a Roth IRA. The correction must be done by October 15, 2018. This procedure is no longer available for tax years after 2017. It was repealed by the Tax Cuts and Jobs Act of 2017.

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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 need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.

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Check your 2018 withholding.

With the tax law changes for 2018, many taxpayers will find their payroll tax withholding isn’t enough to protect them from penalties for underpayment of estimated tax. I recommend that you review your withholding with your tax advisor now to consider whether your should increase your federal tax withholding. The current interest rate for computing the penalty for underpayment of estimated tax is 5%. Also, since personal exemptions have been repealed for federal tax reporting but not for state tax reporting, you should probably give your employer separate state income tax withholding instructions. The California form is DE-4.

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Special pre-publication offer for update of Secrets of Tax Planning for Employee Stock Options, 2018 Edition.

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. We are now accepting preorders for Secrets of Tax Planning for Employee Stock Options, 2018 Edition from our subscribers for half price through September 30, 2018. The book has just been submitted to the printer, so it should be shipped during the last half of September.

The half-price investment for the book is $149.99 plus $20.00 shipping and handling and $15.72 California sales tax for California residents. Here are links for details, or call in your order to Dawn Siemer weekdays at 408-918-3162. Follow the links to buy online https://www.siliconvalleypublishingcompany.com/products/secrets-of-tax-planning-for-employee-stock-options-2014-edition using the coupon code SESO2018.

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CPAs! Want help with your promotions, newsletter, online articles, or books?

Michael Gray, CPA is available for promotional and content writing assignments. In addition, some of our publications and articles are available for licensing (use for a fee). Want more information? Call Michael Gray weekdays at 408-918-3161.

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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.

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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.

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Court withdraws Altera ruling.

In the Altera ruling, the Ninth Circuit Court of Appeals reversed a 2015 Tax Court decision against the IRS and upheld the validity of a regulation requiring controlled entities entering into qualified costs-sharing agreements to share stock-based (including employee stock options) compensation costs.

One of the judges that was part of the majority in the case died after oral arguments in October 2017 but before the decisions were filed on July 24, 2018.

The Ninth Circuit has now withdrawn both the majority and dissenting opinions to allow time for a “reconstituted panel” of judges to confer.

(U.S. Court of Appeals for the Ninth Circuit, Order No. 16-70496, Altera Corporation and Subsidiaries v. Commissioner, August 7, 2018.)

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Automatic extensions for information returns limited.

The IRS has issued final regulations that eliminate automatic extensions of time to file certain information returns, including the W-2 series except Form W-2G and Form 1099-MISC with information in box 7. Only one 30-day extension will be allowed with IRS consent for those forms.

An automatic 30-day extension of time to file will be allowed for other forms provided the filer (or person transmitting the information return for the filer) files an application on Form 8909, Request for Extension of Time to File Information Returns, on or before the due date for filing the information return at the address specified in the instructions for the form.

Extensions with consent are also applied for using Form 8909. If an automatic 30-day extension is allowed for an information return, an additional 30 days extension may be allowed with IRS consent.

Some of the forms for which automatic extensions will be allowed include Form 3921 (Exercise of an Incentive Stock Option), Form 3922 (Transfer of Stock Acquired Through an Employee Stock Purchase Plan), and Form 1099 series (except forms reporting nonemployee compensation.)

An extension of time to file an information return does not extend the time for furnishing a statement to the person with respect to whom information is required to be reported.

The regulations are effective to requests for extensions of time to file information returns required to be filed after December 31, 2018.

(TD 9838, August 3, 2018.)

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IRS issues draft 2019 Form W-4.

Form W-4 is the form submitted by employees to their employers for computing withholding for the employees’ payroll. Since personal exemptions were repealed in the Tax Cuts and Jobs Act of 2017, the 2019 Form W-4 is quite different from what we have seen before. Here is a link to a draft version of the form. https://www.irs.gov/pub/irs-dft/fw4–dft.pdf I’m afraid both employees and employers will be confused in using the form. Remember, you can just use the standard deduction and don’t have to submit the details requested on the form.

More importantly, employees should separately complete the state version of the withholding form. In California, that’s Form DE-4. Here is a link to the 2018 version of that form: https://www.edd.ca.gov/pdf_pub_ctr/de4.pdf California still has personal exemptions and hasn’t limited or repealed itemized deductions that were repealed for federal tax reporting.

If not sooner, I recommend that you have your tax return preparer help you with these forms for 2019 when you have your 2018 income tax returns prepared.

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IRS blocks state workarounds for federal deduction limit.

California, New York and other states have been passing or proposing laws for taxpayers in those states to avoid the $10,000 annual federal itemized deduction limit for state and local taxes (including real estate taxes). The states have proposed qualifying payments as charitable contributions with a state tax offset.

Under the proposed regulations, the state tax credit expected in exchange for a charitable contribution is a “quid pro quo” (benefit received in exchange) disqualifying the deduction for that amount.

There is a di minimus rule in the proposed regulation allowing a taxpayer to receive a state tax credit for up to 15% of the donation.

The regulations are proposed to be effective for charitable contributions made after August 27, 2018.

The regulations also apply to state tax laws that were in effect before the Tax Cuts and Jobs Act of 2017 was enacted, so it eliminates the tax benefit of California’s College Access Tax Credit (50% of donation amount) for charitable contributions made after August 27, 2018.

(REG-112176-18, August 23, 2018.)

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Section 83(b) election doesn’t work for regular tax for ISOs.

A Section 83(b) election can be made when you exercise a nonvested incentive stock option. (Some ISO plans have an early exercise privilege.) The election doesn’t work for regular tax reporting but does work for alternative minimum tax reporting.

The election can result in some havoc when there is a disqualified disposition of the stock. I have a situation where clients made an installment sale of their stock. For regular tax, they had ordinary income for the disqualified disposition for the year of the sale. The ordinary income isn’t eligible for installment sale reporting. For the alternative minimum tax, the tax basis of the stock (fair market value at exercise) is zero. All of the principal payments are short-term capital gain. This can result in an alternative minimum tax liability for future years.

A solution may be to elect out of installment sale reporting. (Remember installment sale reporting is a default election; you have to elect out of installment sale reporting for it to not apply.) In that case, the short-term capital gain may be reported in the same year as the ordinary income, eliminating some or all of the alternative minimum tax.

If you are facing a similar dilemma, consult with your tax advisor about possibly electing out of installment sale reporting as a possible solution.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm<. Some of the sites where you can share your experiences include yelp.com and siliconvalley.citysearch.com.

We use Angie’s List to assess whether we’re doing a good job keeping valued customers like you happy. Please visitAngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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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.

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Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to mgray@stockoptionadvisors.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/stock/nqso-faq/.

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Follow me on Social Media!

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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.

I’m also on Facebook, LinkedIn, and Google+.

you can also follow me on other social media sites, Facebook, LinkedIn, and Google+.

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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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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.

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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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Subscribe to Michael Gray, CPA’s Option Alert!

To receive the next issue of Michael Gray, CPA’s Option Alert with more employee stock option tax developments and answers to questions from our readers automatically via email, subscribe by filling out the form below.

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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)

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