NQSOs: Taxes Advanced

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

Tom Davison and Liam Hurley
Right after you have completed your taxes is a great time to do your big-picture financial planning. 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.

Taking An Overseas Assignment: Stock Compensation For Mobile Employees

Mark Miller
For employees and executives, international travel and relocation are increasingly common. Taxation for "mobile employees" is always complex, and never more than with equity compensation. This article explains the key rules in cross-border situations.

Reporting Company Stock Sales

The myStockOptions.com Tax Team
UPDATED! 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, employee stock purchase plans, and stock appreciation rights.

NQSOs: Tax Return Tips And Traps

Martin Nissenbaum
Whether you complete your own tax return, want to review what your tax preparer did, or want to check what your software produced, it's important to understand basic reporting requirements of stock options. Let's review what, if anything, you need to report on your tax return.

Avoid Costly Tax Return Mistakes And Maximize Your Profits: What Optionholders Need To Know

Bruce Brumberg and Lynnette Khalfani
UPDATED! Tax-filing season can be onerous. If you're puzzled by a 1099-B form or don't quite know how and where to report gains and losses with stock options or ESPPs, this article is for you.

How The Bush Tax Cuts Still Affect Your Stock Option Planning

Tom Davison
UPDATED! The Bush administration's 2003 tax cuts and later extensions continue to affect tax strategies for NQSOs, ISOs, and restricted stock.

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 about promoters who claim they can help optionholders avoid income tax or AMT on stock option exercises. The notice presents several frivolous arguments you should not make on tax returns. The IRS has been aggressively pursuing and winning cases against such arguments. (To read this you need the Adobe Acrobat Reader, which you can obtain free here.)

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FAQ Table of Contents:

Withholding

W-2s & Tax Returns

Netting Gains and Losses

Advanced

Withholding

May I have my employer withhold more taxes upon my exercise of an NQSO than the minimum required amount?

Whether you can withhold more or not, the mandatory federal withholding rate...

If I exercise NQSOs, will I need to make estimated tax payments?

At a minimum, when you exercise your stock options, your company will withhold taxes at the required federal withholding rate for supplemental income. However, depending on your income, this minimum withholding may not be enough. If so, you will need to...

How is fair market value determined for W-2 reporting of NQSO taxable income at exercise and for tax withholding?

To calculate the taxable income at exercise, your company subtracts your exercise price from the fair market value (FMV) of the stock at exercise. Approaches to this FMV calculation depend on...

My new company withheld Social Security tax from my wages even though I "maxed out" on these taxes this year from my stock option exercise and restricted stock vesting at my prior employer. Can I get a refund or a credit on my tax return?

When you have more than one job in a year, each company must withhold Social Security tax without considering what the other company withholds. The result could be...

Are the tax rules and withholding for NQSOs different if I am an independent contractor, consultant, or outside director and not an employee?

In some ways they are similar, though different if you were an employee at the time of grant. The tax treatment of NQSOs is...

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W-2s & Tax Returns

How do I report the income that results from the exercise of a nonqualified stock option on my federal income-tax return?

The full spread is included in your gross income for the year of exercise and is taxed in the same way that your...

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...

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

The gain from your nonqualified stock option exercise(s) is totaled on the W-2 with other income in the following boxes...

Schedule D diagram! How do I report any gain that results from the sale of my NQSO shares on my federal income-tax return?

You need to complete a Schedule D, Capital Gains and Losses, for the year of the sale of your stock and...

Schedule D diagram! I did a cashless exercise with my nonqualified stock options last year. Do I need to show the transaction on Schedule D of my Form 1040 tax return, or can I ignore the broker's statement (1099-B) since there are no gains or losses to report?

You should still file Schedule D, which is used to report capital gains and losses...

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...

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...

Schedule D diagram! I exercised NQSOs, held the stock, and now have long-term capital gains on the sale. Do I get any "credit" on my tax return for the income tax I paid for the spread at exercise?

This differs from the situation with ISOs in which your exercise-and-hold triggers AMT and you then have a tax credit...

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

Apart from applying for an extension, which delays only the filing of your tax return, not the actual payment, you have a few choices...

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...

How does stock compensation affect my tax rebate under the Economic Stimulus Act?

The Economic Stimulus Act of 2008, signed by into law by President Bush on February 13, 2008, may result in a tax rebate for you. However, any stock compensation that raised your adjusted gross income in 2007 counts towards the rebate's income thresholds and the phaseout, even if...

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Netting Gains and Losses

What happens if I sell the shares for less than the fair market value on the date of exercise of the NQSO?

You have a capital loss for federal income tax purposes...

The spread on my NQSO 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. This means you cannot use capital losses to offset ordinary income. However...

What happens if I have a capital gain from one sale of company stock and a capital loss from another sale of company stock or another security?

The treatment for tax-loss harvesting is similar to that of owning and selling any two stocks. The income-tax reporting for multiple transactions is...

Are there any stock-option strategies for using my capital-loss carry-forwards?

A capital-loss carry-forward from the past year is first used to offset capital gains from stock sales this year, dollar for dollar, up to the full amount of the carry-forward. For example, if you are holding appreciated company stock from a nonqualified stock option exercise or restricted stock vesting, you will be taxed on any capital gains when you sell it...

Do I receive any tax benefits if I have a capital loss after the sale of NQSO shares?

Yes, the benefits from tax-loss harvesting are the same as those for selling any stock at a loss...

I have grants of vested in-the-money and underwater options. If I exercise all my options and immediately sell the stock, can I offset the gains in the options with the losses (on the underwater options)?

This is wishful thinking, because these are two separate transactions. It does not make sense to...

Do I have a tax loss if my NQSOs expire without being exercised?

No. Although you have performed services for the company and your options clearly have economic value...

Both dividends and long-term capital gains are now taxed at the same rate. Can I net my dividends from my company stock against capital loss from the sale of company stock or another security?

No. Under the 2003 tax cut, qualified dividends are taxed at the same rates as long-term capital gains...

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Advanced

Are there financial strategies for NQSOs?

As other FAQs and articles in this section explain, there is no universal plan for everybody. With that said, we present some general advice from experts...

UPDATED FOR 2008! What are some year-end strategies for stock options, stock appreciation rights, and restricted stock?

This depends on your financial situation, on whether your decisions should be entirely tax-driven, on what you did earlier in the year, on your outlook for your company's stock price, and on the prospects for changes in tax law during the year ahead. Below we present 10 ideas...

My company's stock price has dropped since I exercised my NQSOs. Is there anything I can do to reduce the taxes I owed on the spread at the time of exercise?

No. Since the spread between the exercise and market price for NQSOs is taxed as ordinary income upon exercise, the tax is fixed on that date...

My company backdated more stock options than just those of the senior executives. How does this affect employees like me and the taxation of my stock grants?

At a minimum, do not expect any new stock option grants with an exercise price lower than the market price on the grant date. The tax treatment varies by type of grant. Some companies are freezing exercises and ESPP purchases and are making modifications in grants by...

If I move to another country to work, will I still have to pay US taxes on option exercises, restricted stock vesting, and stock sales? Can I avoid double taxation?

The United States taxes the worldwide income of US citizens regardless of whether the income arises from activities in the US...

What happens if I live in state A when my stock options are granted, state B when I perform some of my services, state C when I exercise the options, and state D when I sell the shares?

Generally, each state you live in determines what income is taxable and when. For administrative ease, many companies...

NEW! What is the tax impact on me if my company modifies its outstanding stock options and stock appreciation rights?

With approval from the board and shareholders, your company can modify outstanding grants in a way that is consistent with its stock plan. It should avoid...

UPDATED! Does the American Jobs Creation Act, particularly Section 409A on deferred compensation, affect my stock grants?

A number of tax law provisions and interpretations that may affect your stock grants occur in the wide-ranging American Jobs Creation Act of 2004 (AJCA); the final regulations on deferred compensation under Section 409A (issued on April 10, 2007), which adopt the...

How do I use stock that I own to exercise an option in a stock swap? What is the tax treatment?

A "stock swap" or "stock for stock" exercise is a stock option exercise in which the exercise price is paid with shares of company stock you own...

What tax treatment applies after ISOs are converted to NQSOs?

ISOs must have certain characteristics, and the grant must follow certain rules in the tax code. Otherwise, the ISOs will be taxed like...

With NQSOs, is there any tax risk after exercise if the market price of my stock substantially rises or drops by the time I pay my taxes?

The tax treatment is fixed at the time you exercise NQSOs, regardless of the future direction of the...

If I sold my stock immediately upon exercise or at vesting, the transaction would violate the insider trading laws and the laws of short-swing profits under Section 16(b) because I had a purchase within six months of the sale. Would this then delay the date of the tax treatment?

The spread at exercise is what matters for the tax calculation...

If I exercise my NQSO and immediately donate the shares to charity, do I still need to pay the taxes on the spread at exercise?

Yes. The option exercise and the...

What are "discounted" stock options, and how are they taxed?

Stock options are usually granted with an exercise price equal to the fair market value (FMV) of a share of company stock on the grant date of the option. Once it falls below the FMV they become discounted stock options, which raise multiple issues, including...

Does the accelerated vesting of my stock options, restricted stock, and/or performance shares in a change of control have any tax impact on me, such as for ISOs and golden parachute payments?

With stock grants of normal size, you face no tax impact beyond the standard tax treatment. ISOs may be converted to NQSOs should any acceleration of vesting cause...

Is it possible to defer the gains on an NQSO exercise by having the shares delivered in a later tax year?

Under a limited number of stock plans, it used to be possible to defer delivery of shares, and related taxes, to some time after exercise or vesting. However, under Section 409A of the American Jobs Creation Act of 2004 (AJCA), this type of deferred compensation is...

Will my company be able to take a tax deduction for the value of my restricted stock, restricted stock units, performance shares, or stock options if my compensation already exceeds $1 million?

This depends on what triggers vesting. Section 162(m) of the tax code limits your company's deduction to $1 million unless a senior officer's compensation over this amount meets the performance-based exception. Stock grants are structured to meet this by...

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