Michael Gray, CPA’s Option Alert #145

An irregular alert for issues relating to employee stock options

May 5, 2016

© 2016 by Michael Gray, CPA

ISSN 1931-2768

(If you find this information valuable, please pass it on to a colleague!)

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Does your tax return need a second look?

There’s an old story about two barbershops having a price war. Finally, one of the barber shops posted a sign, “$2 haircuts fixed, $10.” If you have an uncomfortable feeling about tax returns prepared for you last tax season (especially with stock option transactions), it might be worthwhile to let us have a second look at them. Call Dawn Siemer at 408-918-3162 on Mondays, Tuesdays, or Thursdays to make an appointment.

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Second quarter estimated tax deadline is June 15

The second estimated tax due date for calendar-year taxpayers is June 15. Federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2015 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 2015.

The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2015 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 2016.

If you want our help computing your second quarter estimated tax payments, call Dawn Siemer at 408-918-3162 on Mondays, Tuesdays, or Thursdays to make an appointment for a consultation.

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Surviving spouse doesn’t “inherit” her deceased husband’s minimum tax credit.

An individual exercised an incentive stock option, resulting in an alternative minimum tax and a minimum tax credit. The individual later married and filed joint income tax returns with his spouse. Several years after his death, the surviving spouse tried to use his minimum tax credit to reduce her regular tax liability.

The Tax Court upheld the IRS in disallowing the minimum tax credit. Spouses are individual taxpayers, despite being able to file joint income tax returns. Since the alternative minimum tax was incurred before marriage, it expired at the death of the deceased spouse.

(Vichich, 146 TC No. 12.)

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Be careful when modifying the terms of an incentive stock option

Sometimes events happen where an employer wants to extend the term of an incentive stock option, such as an incentive to keep a key employee.

Such an extension can have disastrous consequences.

According to Internal Revenue Code Section 424(h), the modification, including an extension, of an incentive stock option is considered the grant of a new option. If the option price isn’t changed to the fair market value on the date of the extension, the option probably won’t qualify as an incentive stock option (Internal Revenue Code Section 422(b)(4)). The option will also probably violate the option pricing rules under Internal Revenue Code Section 409A, resulting in severe penalty taxes for the employee!

Look before you leap!

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Accelerated vesting isn’t a modification of an ISO

According the Internal Revenue Code Section 424(h)(3)(C), the accelerated vesting of ISOs isn’t a modification.

This is helpful, since many companies accelerate the vesting of ISOs if the company is acquired.

However, if the option price of ISOs that are initially exercisable for the year exceeds $100,000, some of the ISOs will be converted to non-qualified stock options (NQSOs). (Internal Revenue Code Section 422(d).) The exercise of the NQSOs will result in ordinary compensation income, subject to withholding and employment taxes.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as “How I created a public access television show broadcast on eleven Bay Area stations.” To make arrangements, call Michael Gray at 408-918-3161.

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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.

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Financial Insider Weekly broadcast schedule for May and June.

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:

May 6, Greg Carpenter, business broker, “Buying a business”
May 13, Greg Carpenter, business broker, “Selling a business”
May 20 and 27, Bettie Baker Marshall, Attorney at Law, “Legal concerns when caring for an incapacitated friend or relative”
June 3 and 10, David Howard, Attorney at Law, “Reporting requirements for foreign bank and investment accounts”
June 17, Sharon Lacy, CFP®, CPWA®, United Capital Financial Advisors, “Social Security basics”
June 24, Sharon Lacy, CFP®, CPWA®, United Capital Financial Advisors, “Social Security concerns for married couples”

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!

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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 our books at www.siliconvalleypublishingcompany.com and our special reports: “Executive Tax and Financial Planning For Non-Qualified Stock Options”and “Executive Tax and Financial Planning For Incentive Stock Options”.


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.

I’m also on Facebook and Linked In. You can also follow me on other social media sites, Facebook and www.linkedin.com/in/michaelgraycpa.

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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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