Michael Gray, CPA’s Option Alert #172

An irregular alert for issues relating to employee stock options

October 3, 2018

© 2018 by Michael Gray, CPA

ISSN 1931-2768

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Extended individual and C corporation income tax returns are due October 15.

Does your tax return preparer have your information to prepare your income tax returns yet? (Congratulations to those who have already filed their income tax returns!) Note that victims of Hurricane Florence have until January 31, 2019 to file their 2017 income tax returns, and make their estimated tax payments that otherwise have been due on September 17, 2018 and to file their payroll and excise tax returns.

(IR-2018-187, IR-2018-189.)

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Florence victims might qualify to claim 2018 hurricane losses on their 2017 income tax returns.

There is a special rule allowing a tax deduction for casualty losses attributable to a federally-declared disaster on the previous year’s income tax return. For Hurricane Florence, the amended income tax return to claim this loss is due October 15, 2019. I recommend that you consult with a tax professional when claiming this loss.

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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 you 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 Also, since personal exemptions have been repealed for federal tax reporting but not for state tax reporting, you should probably give your employer separate state income tax withholding instructions.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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For tax professionals and advisors — Live seminar about 20% Deduction For Business Income with Michael Gray, CPA.

The tax deduction of 20% of qualified business income under Internal Revenue Code Section 199A is one of the most complex provisions of the Tax Cuts and Jobs Act enacted on December 22, 2017. The IRS has issued proposed regulations about how to apply the new rules.

At this lunchtime seminar, Michael Gray will explain the highlights of the proposed regulations to help tax professionals and financial planners work with clients to plan for and implement the new rules.

The seminar will be located at Abbott, Stringham & Lynch, 1530 Meridian Ave., San Jose on Tuesday, October 23. Registration will be at 11:45 a.m. and the program will start at noon and conclude at 1:30 p.m. The investment, which includes lunch, is $30 for CalCPA members and $70 for non-members.

Online registration is at www.calcpa.org/svsj. For phone reservations, call Regine Staufenberg at 650-436-7169.

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CPAs! Want help with your promotions, recruiting notices, newsletters, 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 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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House passes Tax Reform 2.0 legislation.

Don’t hold your breath for the Senate. The House of Representatives has passed tax legislation that would make the individual and noncorporate tax provisions that are currently scheduled to expire after 2025 permanent. At least 60 votes would be required to pass the legislation in the Senate, which now seems highly unlikely. The legislation probably won’t pass in Congress this year.

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Families with Dynasty Trusts should review their generation skipping tax planning.

Under the Tax Cuts and Jobs Act of 2017, the generation skipping tax exemption for an individual has increased to $11,180,000 for 2018 from $5,490,000 for 2017. If individuals created a “dynasty trust” (an irrevocable trust designed to last several generations) before 2018, and those individuals are still living, they should consult with their tax advisors about whether they should take any actions now to use their additional generation skipping tax exemption before its scheduled expiration after 2025.

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If you’re planning to leave your employer, don’t make a Section 83(b) election for ISOs

(This is a reminder of a tax planning issue that still applies for 2018.)

One of our readers asked for our guidance to his tax return preparer.

He made an early exercise of incentive stock options during 2014, but left his employer early in 2015. None of the stock was vested and he forfeited all shares back to the employer.

No Section 83(b) election was made.

Since the employer (correctly) issued Form 3921 for the exercise of incentive stock options during 2014, the tax return preparer believed that the exercise had to be reported as income on the alternative minimum tax form (Form 6251) for 2014.

I pointed out to the preparer that, according to Internal Revenue Code Section 56(b)(3), the rules for incentive stock options under Internal Revenue Code Section 422 don’t apply for the alternative minimum tax. That means the rules for nonqualified stock options under Section 83 apply to incentive stock options for AMT reporting.

Since no Section 83(b) election was made, taxable income is reported based on the excess of the fair market value over the option price as the shares vest.

In this case, the shares never vested, so there was no taxable income for AMT reporting for 2014.

To make the situation clear for the tax return preparer and the IRS, I prepared a footnote disclosure for the taxpayer’s income tax return. However, since this treatment is dictated by the Internal Revenue Code, no disclosure is really required.

If a Section 83(b) election was made, the shares would have been treated “as if” they were vested for AMT reporting when the ISO was exercised in 2014, which would have resulted in a big tax for that year.

Think carefully before making the election, especially if it seems likely you will soon be leaving your employer and will have to forfeit shares.

If your tax return preparer reported AMT income for an early exercise of ISOs and you didn’t make a Section 83(b) election, and you want help amending your tax return to claim a refund, call Thi Nguyen for an appointment at 408-286-7400, extension 206.

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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. Back episodes 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.

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Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they’re posted on Youtube? Want to see Michael Gray’s blog posts as soon as they’re live? We post them (and more) on social media!

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.)

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