Alert: Planning For Stock Compensation After Tax Season (April 26, 2011)
Now that the deadline for tax returns has passed, you will want to read our articles about stock option planning after tax season.
Below we summarize a few key recent additions or updates to the award-winning content of myStockOptions.com. A full list of content added and updated during the first quarter of 2011 is also available. Don't want to wait for these quarterly updates? Keep up in real time at The myStockOptions.com Blog.
Stock Comp More Likely Than Ever To Trigger IRS Audits
Fluctuations of income, including sudden increases from stock compensation, can be a red flag triggering a dreaded audit by the IRS—especially now. The IRS Data Book has disclosed a large increase in audits among people whose adjusted gross income is over $500,000 per year, with a particularly big jump for those with income over $5 million. IRS audits are performed at three different levels, depending on the zeal of the investigation.
- Correspondence audits are conducted by mail and seek to verify deductions and credits that you have claimed on your tax return. The number of correspondence audits has risen by over 100% in recent years.
- Office examinations, held on IRS property, entail a meeting between you and IRS compliance officers to scrutinize your tax return.
- Field examinations, the most demanding (and uncomfortable) type of audit, involve a visit by IRS revenue agents to your office or home for a thorough analysis of information pertaining to individual and/or corporate tax returns.
Normally the IRS can perform audits only within a three-year statute of limitations that starts on the filing date of a tax return. However, in some circumstances the IRS can obtain a six-year statute of limitations for what it believes to be "substantial underreporting of income."
For more on IRS audits of both individuals and corporations, see the FAQ on myStockOptions.com. For help in avoiding the types of tax mistakes that can draw the attention of the IRS, see the articles and FAQs in the Tax Center on myStockOptions.com.
Will You Need To Pay Estimated Taxes On Stock Compensation?
Now that tax return season is over, it's time to look at the tax year ahead. Federal tax law requires you to pay at least 90% of your income tax liability during the year through either withholding or quarterly estimated tax payments (with a few safe harbor exceptions). If an option exercise or restricted stock/RSU vesting pushes your income above the usual withholding amount, you may need to pay estimated taxes to make up the difference and avoid paying penalties and interest.
You make estimated tax payments quarterly by the 15th (or the next business day) of April, June, and September in the year of exercise and by January 15 (or the next business day) of the following year. The deadline for the first quarter of 2011 recently passed on April 18. The next due dates for the 2011 tax year are June 15 and September 15 of 2011 and January 17 of 2012.
See myStockOptions.com for general strategies involving estimated tax payments, for the safe harbors that let you avoid penalties, and for details on estimated taxes with NQSOs, ISOs, restricted stock/RSUs, and stock appreciation rights.
AMT Trigger Points In 2011: A Helpful Guide
People who live in high-tax states and itemize tax deductions, or have significant personal exemptions, can easily become subject to the notorious alternative minimum tax (AMT). Despite income exemption amounts for 2011 that are intended to provide some AMT relief, the AMT risk remains particularly high after exercising and holding incentive stock options with a big paper gain at exercise. How can you know whether you will trigger the AMT? A newly updated FAQ at myStockOptions.com presents a table which estimates the tipping point for adjustments to taxable income, such as ISO exercises, that can trigger the AMT in 2011.
You may be surprised to find that even if you exercise your ISOs and sell the stock within the calendar year of exercise, giving you all ordinary income and thus no AMT adjustment, you may trigger the AMT anyway. To find out why, and to learn more about AMT strategies, see the FAQs on minimizing the AMT and on planning when you know you will trigger the AMT.
Global Updates: UK, Ireland, Denmark
A new British tax year began on April 6. See the United Kingdom section of our Global Tax Guide for changes in tax law that can affect UK taxpayers holding shares from equity awards—especially new personal exemptions and a revised threshold for the higher rate on capital gains. Elsewhere in the Global Tax Guide, we detail recent changes affecting the payment of social taxes on equity compensation in Ireland and Denmark.