Tax Center: ISOs: W-2s & Tax Returns

Stock Option Financial Planning After Your Tax Return Is Filed And At Year-End (Part 1)

Tom Davison and Liam Hurley
UPDATED! The period just after the completion of your tax return is a great time to do your big-picture financial planning for 2010 and beyond. You can more accurately project your income and likely tax situation for the remainder of this year and the next, including AMT risk and capital-loss carry-forwards, to develop your strategy. At the end of the year, review your analysis and strategy again.

How To Report Sales Of Company Stock

The myStockOptions.com Tax Team
UPDATED FOR 2010! Learn how to report your sales of company stock on Schedule D of IRS Form 1040. Our comprehensive guide to Schedule D reporting covers sales of stock from nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, and stock appreciation rights.

Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2010

Bruce Brumberg and Lynnette Khalfani
Tax returns can be onerous. Read this article if you are puzzled by Form 1099-B or don't know how and where to report sales of company stock from options or employee stock purchase plans.

ISOs: Tax Return Tips And Traps

Tax reporting with incentive stock options (ISOs) can be tricky. Learn what you need to report on your return at each stage of your ISO's life cycle.

Tax Return Mistakes And Error Prevention

Bruce Brumberg, Editor-in-Chief
myStockOptions.com
Adapted from a webinar by the editor-in-chief of myStockOptions.com, this PowerPoint (in PDF) covers the top 10 most common tax-return errors and questions related to stock compensation, whether options, restricted stock, or ESPPs. The coverage includes a discussion of 2009 and 2010 tax-law changes that affect tax returns and planning. (Upon request, Premium Members can obtain permission to use the presentation for employees or clients.)

IRS Instructions For Form 6251: Alternative Minimum Tax

Internal Revenue Service
The line-by-line instructions explain how the AMT is calculated and what the IRS expects on the form, including the adjustment for ISO exercises.

Avoid These Tax Blunders

Sue Stevens
Morningstar.com
Almost nobody likes preparing income tax returns, but you'll like it even less if you make mistakes and pay more tax than you need to. Most of the suggestions remain useful every tax year. (Free registration is required.)

IRS Guide To Auditing Techniques For Stock-Based Compensation

Internal Revenue Service
The IRS tips its hand on what its agents look for in audits related to all types of stock pay to ensure compliance, whether by corporations or executives.

IRS And Treasury Warn Against Frivolous Tax Arguments Surrounding Stock Options

IRS and US Department of the Treasury
The Treasury and IRS have warned taxpayers against several frivolous arguments you should not make on tax returns. The IRS has been aggressively pursuing and winning court cases against such arguments.

AMT: Meet The Enemy

Anne Tergesen
BusinessWeek
Become familiar with IRS Form 6251, "Alternative Minimum Tax—Individuals." Walk through the form; the lines that apply to ISOs and other troublesome portions are highlighted.

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UPDATED FOR 2010! What are the biggest mistakes related to stock options I can make on my tax return, and how can I avoid them?

It is easy to make mistakes that lead to paying more tax than you need to, or that may even prompt a review by the IRS. For example, with a cashless exercise/same-day sale, even though you never owned the stock after exercise, you still must...

UPDATED! When I file an extension to complete my tax return after the IRS deadline, are there any mistakes I should avoid that involve stock grant income?

Stock compensation income can raise your income tax and make your tax return complex. The IRS has a form that lets you apply for an automatic six-month extension for the due date of your tax return (until mid-October). Mistakes include not paying taxes owed with...

W-2 diagram! What will my W-2 show after I exercise incentive stock options?

For an ISO exercise in which you hold the stock, nothing is...

Schedule D diagram! I did a cashless exercise with my incentive stock options. Should I still report it on Schedule D even though the gain is zero? And what about any alternative minimum tax?

By selling the ISO stock at the same time you exercised it, you eliminated the AMT. The same would be true if you had sold the stock at...

Schedule D diagram! How do I report a sale of shares in a sell-to-cover exercise?

When you do a sell-to-cover exercise and sell just enough shares to cover the exercise cost, the brokerage commission, and the taxes, you report only...

Schedule D diagram! After I satisfy the ISO holding periods, how do I report a sale on my tax return?

After you have held the stock more than two years from grant and one year from exercise, the spread between the sales and exercise prices is...

Schedule D diagram! How am I taxed if I have made a disqualifying disposition (e.g., sale) of ISO shares in a different year than the year I exercised the option? How do I report this?

The rules are similar to those that apply to sales of ISO shares made in the same year as exercise; the difference is that you are taxed in the year of the sale of the stock...

Schedule D diagram! I exercised my ISOs and sold the ISO stock later in the same year. How is this reported on my tax return when the stock price at sale is higher or lower than at exercise?

If you sold the stock at a price higher than it was on the day of your exercise, the spread at exercise is still...

Schedule D diagram! When I sell my ISO shares in a disqualifying disposition, will the broker's commission reduce the amount of ordinary income on my W-2 or the amount of gross sales proceeds on my Schedule D?

The final IRS/Treasury regulations on ISOs make clear that the amount of ordinary income in a disqualifying disposition is...

Schedule D diagram! If I did cashless exercises/sales of stock options from several grants simultaneously, do I need to report each sale separately on Schedule D? Can I aggregate them in one line because I exercised and sold the stock on the same day?

Though each grant adds a different amount of money to your taxable ordinary income, the tax basis of all the shares is...

After I have paid AMT for my ISO exercise and hold, what are some mistakes that I must avoid on my tax return?

Whether you still hold the ISO stock or you sold it in the past year, once you have paid AMT your tax returns get complex. The AMT is basically a prepayment of the tax on ISOs. You will get a credit for it in subsequent years, even when you have not sold the ISO stock. This means, for example, that you still need to...

UPDATED! Can stock grant income affect my eligibility for the Making Work Pay Credit in 2010?

Yes. The credit has income limits, so a big enough spike in your income from a stock compensation could push you out of the credit range or complicate your tax return...

The amount of my spread at exercise was not listed on the W-2 that I received from my company, even though I made a disqualifying disposition. Do I report this gain on my tax return, and how will I be taxed?

This type of situation, in which the disqualifying disposition does not appear on the W-2, is more likely to occur when...

The spread on my cashless ISO exercise is reported on my W-2 as ordinary income. Can I use my stock-trading losses to offset this income?

The tax law says that you can offset losses against only the same type of income...

What should I do if I don't receive a W-2 or if I lose it?

If the company has not issued a W-2 by the middle of February, the IRS suggests...

How am I taxed if I make a disqualifying disposition (e.g., sale) of ISO shares in the year I exercised the option?

While you lose the opportunity to have the lower long-term capital gains rate apply to the difference between the exercise and sale price, the alternative minimum tax (AMT) no longer applies. You do have compensation income and perhaps short-term capital gains equal to...

Is all the income that results from a disqualifying disposition of ISO shares a short-term capital gain that I can net against my capital losses on Schedule D of my tax return?

No. All or part of it may be ordinary income. You have capital gains only when you...

I received a notice (CP-2000) from the IRS stating that, according to last year's tax return, I owe money for the cashless exercise of my stock options. I thought I paid all the taxes through withholding at exercise. How do I reply?

You made this mistake because the stock sale at exercise does not generate any gains. The full spread between your exercise and sale prices was added to your W-2, and taxes were withheld at exercise, so you thought you did not need to report the sale on Schedule D of your Form 1040. However...

My company's stock is now essentially worthless because of securities fraud by senior executives. Can I claim a casualty or theft loss on my tax return?

A casualty or theft loss would allow you to deduct the lost amount against your ordinary income, subject to some limits. However, Treasury regulations and court rulings would probably stand in your way. Nevertheless, what you can do is...

I acquired stock from exercises and restricted stock vesting a few years ago. When I sell the stock, how do I rediscover the cost basis for Schedule D of my tax return?

Let's first review the tax rules and the W-2 reporting. The tax basis for...

What should I do if I forgot to report the ISO exercise/hold on my tax return but now realize I may owe AMT?

Generally, if you find a tax-return error and the statute of limitations period has not yet ended, you are required to file...

Is it easy to calculate AMT liability?

The AMT rules and forms baffle even tax professionals. You can better understand the process by...

In general, how does the alternative minimum tax (AMT) calculation work?

The AMT system is complicated. Broadly, it starts by taking your adjusted gross income, subtracts your itemized deductions, makes certain negative and positive adjustments, and includes certain tax items called tax "preferences." The resulting amount...

Do I get a tax credit if I paid AMT when I exercised an ISO? How does it work, and did the tax law of October 2008 change this?

You now have two alternatives for using up your AMT credit. If you owe AMT for the tax year in which you exercised an ISO, all or a part of the amount by which your AMT liability exceeds your regular tax liability can generate a tax credit that...

If I've paid AMT, is there an adjustment when I sell the ISO shares so that I get all the taxes back?

It's not that simple. AMT requires you to account separately for ISO shares not only at exercise but also when the shares are sold. If you paid AMT as a result of exercising ISOs, your sale of the ISO shares provides an opportunity for you to recover...

What is the tax basis of my ISO stock that I use to calculate the sale gain for AMT purposes?

When you trigger the alternative minimum tax (AMT) from an ISO exercise, you create dual-basis stock. This means that for the purposes of calculating your AMT gain and adjustment, the basis of the shares will be calculated differently for the regular tax and for AMT. For your regular tax, the basis is...

In what ways can I pay my taxes if I don't have the money to pay them with my tax return?

If you simply lack the funds to pay your income tax, you may want to apply for a payment agreement on the...

My company's stock price has dropped substantially since I exercised ISOs, leaving me with a ruinous AMT bill much larger than my gains. Is there anything I can do to reduce or eliminate the AMT I owe?

To eliminate the tax, you would have had to sell the stock in the calendar year of your exercise. Fortunately, however, a "tax abatement" under the Emergency Economic Stabilization Act of 2008 wiped out any AMT liability from ISO exercises before 2008 that you owed but never paid, along with any interest and penalties associated with this ISO-related AMT liability. Though the details of this provision are still being clarified by experts, it does seem...

When I gift stock from an incentive stock option exercise/hold that triggered AMT, do I get an adjustment for it on my AMT return?

Unlike with a stock sale, gifting ISO stock does not result in an AMT adjustment for the difference...

If I did not qualify for a stimulus rebate in 2008, could I have still qualified in 2009?

Possibly. The Economic Stimulus Act of 2008 created a tax rebate for individuals that is based on income in 2007 and/or 2008. Most taxpayers qualified for the whole rebate on 2007 income, and checks were mailed to them in 2008. However, the rebate is still available to a minority of people who did not qualify on 2007 income, or who qualified for only a portion of the full rebate. People with stock compensation may fall into this group...

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