Michael Gray, CPA’s Option Alert #139
An irregular alert for issues relating to employee stock options
November 24, 2015
© 2015 by Michael Gray, CPA
(If you find this information valuable, please pass it on to a colleague!)
Table of Contents
- It’s time for year-end tax planning
- Half-price introductory offer for two new books by Michael Gray
- If you exercised ISOs during 2015, should you use the “escape hatch”?
- Year end planning – should you “harvest” losses before the year end?
- Follow me on social media!
- Check out my blog
- Interested in our other newsletters?
- Consult with a tax advisor
- Subscribe to Michael Gray, CPA’s Option Alert
It’s time for year-end planning
The year is almost over! Schedule your year-end appointment now. With vacation and celebrating holidays, the times for appointments will be very limited.
Call Dawn Siemer at 408-918-3162 on Mondays, Tuesdays or Thursdays to reserve your appointment now.
Half-price introductory offer for two new books by Michael Gray
We are issuing 2015 updates for two books, Employee Stock Options –
Executive Tax Planning and How to use Roth and IRA accounts to build
a secure retirement. We expect to be able to ship the books by mid-
You can buy the books for half price – $14.99 plus $5 shipping and
handling and $1.75 California sales tax for California residents.
This offer expires November 30, 2015.
You can now pre-order the books on our publisher website, www.siliconvalleypublishingcompany.com.
Or you can still call Dawn Siemer at 408-918-3162 on Monday or
Tuesday or fax the reservation forms to 408-998-2766.
If you exercised ISOs during 2015, should you use the “escape hatch”?
Remember if you exercised ISOs during 2014 and didn’t sell the stock, your AMT adjustment will be based on the fair market value of the stock on the date of exercise. However, if you sell the stock before the end of the year of exercise, the AMT adjustment is eliminated. Ordinary income is reported for the excess of the selling price over the option price. I call this strategy “the escape hatch.”
For example, Jean Employee exercised an ISO for 1,000 shares of XYZ stock on March 1, 2015. The fair market value of the shares on March 1, 2015 was $55 per share and the option price was $5 per share. If Jean didn’t sell the stock, she would report additional AMT income of $55 – $5 = $50 X 1,000 shares = $50,000. On December 15, 2015 Jean sells the stock for $15 per share. The AMT adjustment is eliminated and Jean reports $15 – $5 = $10 X 1,000 shares = $10,000 of ordinary income for regular tax and AMT.
There is an important requirement to get this tax benefit. A loss would have to be “allowable” if the stock was sold at a loss. A common transaction that would disqualify an escape hatch is a wash sale. A wash sale happens when replacement shares or an option to acquire replacement shares are acquired during the period 30 days before or 30 days after the sale.
For example, if Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2015, she would still have a disqualifying disposition of the ISO shares, but she would have $50,000 of ordinary income because the escape hatch wouldn’t apply. Her short-term capital loss of $15 – $55 = $40 X 1,000 shares = $40,000 would be disallowed as a current deduction. The disallowed loss would be added to the tax basis of the replacement shares. Therefore, the tax basis of the replacement shares would be $16 + $40 = $56 X 1,000 shares = $56,000.
If you are going to use this “escape hatch” strategy, I suggest not waiting until the last minute. One of my clients was thinking of doing this, and an employee unexpectedly sued the company for an employment-related matter. The company’s stock was locked up for employees because of the lawsuit. My client wasn’t able to use the “escape hatch” strategy.
Year end planning – should you “harvest” losses before the year end?
The stock market has been very active this year. If you have sold securities (or other assets) for capital gains, review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.
Remember the wash sale rules. If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.
Financial Insider Weekly broadcast schedule for November and December.
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 November and December:
- November 27, 2015, Lisa Barr, Silicon Valley Community Foundation, “How to promote community giving as a family value”
- December 4, 2015, G. Scott Haislet, CPA and attorney at law, “Real estate professionals and passive activity losses”
- December 11, 2015, G. Scott Haislet, CPA and attorney at law, “Section 1031 tax-deferred exchanges”
- December 18, 2015, G. Scott Haislet, CPA and attorney at law, “Sale of a principal residence”
- December 25, 2015, Don Pollard, CLU, ChFC, Advanced Professionals, “Medical insurance for individuals”
Financial Insider Weekly is also broadcast as follows:
- Sunday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Sunday at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Monday 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
- Monday at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
- Monday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Tuesday at 10:30 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Tuesday 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
- Tuesday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill
- Wednesday 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
- Thursday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Friday at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
- Friday at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
- Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, “public access TV”
- Friday 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
- Saturday 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
- Saturday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Saturday at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
Broadcast on the internet at the same time as streaming video at www.mhat.tv
Past episodes are available at https://www.youtube.com/user/financialinsiderweek.
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!
Information return procedure issued for 2010
The IRS has issued specifications for information returns, including electronic filing for 2010. The specifications include Form 3921 for Exercise of a Qualified Incentive Stock Option under Section 442(b) and Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c). 2010 is the first year these forms will be required to be issued to employees.
(Revenue Procedure 2010-26.)
Questions and Answers
Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter.
Are non-qualified stock options eligible for a basis adjustment after a death? Is the “built-in” income for the options subject to both estate tax and income tax?
Yes. Non-qualified stock options are reported on the decedent’s estate tax return at the fair market value of the option stock less the option price. (Revenue ruling 53-196.) IRS guidance for gifts of non-qualified stock options indicates that other valuation methods, such as the Black-Scholes model, may be appropriate. (Revenue Procedure 98-34.)
There is no basis adjustment for the amount reported on the decedent’s estate tax return because that amount is considered income with respect of a decedent. (IRC Section 691(c).)
Since the income is taxed twice, Congress enacted an imperfect offset by allowing a tax deduction for estate tax (and generation skipping tax) attributable to accrued income. (IRC Section 691(c)(3).)
Follow me on Twitter, Facebook or LinkedIn!
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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.)