Tax Returns & Tax Cuts: myStockOptions.com Newsletter No. 37, March 2009
|IN THIS ISSUE|
Tax return tips to minimize taxes and avoid mistakes
Articles and podcast on tax return topics
Tax changes enacted and planned: AMT news; capital gains rate cut for some; tax credit
Self-study course on restricted stock for CEP continuing-education credit
|EDITOR'S WELCOME & THANK YOU|
Our tax return content in the Tax Center, including useful annotated examples of Schedule D and Form W-2, is very popular at this time of year. We continue to add and update articles and FAQs, always with helpful examples, as new developments emerge.
We also just added a podcast on tax return topics that you can listen to either in streaming format on your computer or as a download to any portable media player (e.g. an iPod).
Thank you for your continued interest in myStockOptions.com and for your strong support over the years.
~ Bruce Brumberg, Editor-in-Chief
|SPECIAL FAQs ON TAX RETURNS|
Below are two frequently asked questions (FAQs) about reporting income from stock compensation on tax returns. They are taken from the 700+ FAQs on myStockOptions.com, including those in our highly popular Tax Center. All of these FAQs are available for your company to license or by Premium or Pro Membership. Please do not copy or excerpt this information without our permission.
What is the biggest, most common mistake related to stock options that I should look to avoid on my tax return?
With a cashless exercise/same-day sale, the spread is reported as ordinary income on your Form W-2 and your tax return. Even though you never owned the stock after exercise, you still need to report this transaction on Schedule D, which is used to report capital gains and losses on all stock sales. You may even have some small gains or losses, depending on how your company calculates the spread at exercise and on any commissions and fees for the stock sale. For an annotated example of how to report the cashless exercise on your Schedule D, see other FAQs.
If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Schedule D, it would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice for the taxes due.
To avoid other common (and costly!) mistakes, including double-counting your income from exercise on your Schedule D, read the full FAQ on myStockOptions.com (free to registered users through April 1).
With restricted stock, what is a common tax-reporting mistake?
A frequent error is misunderstanding what the tax basis should be for sold shares. Even though you never purchased the stock, your tax basis for the stock sale on Schedule D is the amount of compensation income at vesting that appeared on your W-2 (you already reported it on your tax return). With a Section 83(b) election (not available for restricted stock units) the basis amount is the value at grant from your W-2.
Do not assume that, because you did not pay any money to purchase the stock or exercise anything, your tax basis is zero. Otherwise, you will pay double tax on the value of the shares at vesting. See a related FAQ with an annotated diagram of Schedule D that shows how you report stock sales after you have held the stock at vesting.
Avoid expensive mistakes that attract the attention of the IRS! For other common tax-reporting errors with restricted stock and RSUs, including those related to share surrender used for tax withholding, read the full FAQ on myStockOptions.com (free to registered users through April 1).
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Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2009 by 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. Read this article free!
Avoid Tax Return Mistakes With Restricted Stock & RSUs: What You Need To Know In 2009
Restricted stock or restricted stock units (RSUs) bring their own special issues to your tax return, and they can be more complicated than you think. Avoid pitfalls with reporting any shares sold for withholding, your income at vesting, any dividend income, your capital gains at sale, and more. Read this article free!
Reporting Company Stock Sales
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 stock options, restricted stock, RSUs, performance shares, ESPPs, and SARs.
NQSOs: Tax Return Tips And Traps
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.
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.
In addition to the articles listed above, you can stream or download our new 10-minute podcast on tax return tips. This lively interview explains painful tax return mistakes to avoid. Available free to all registered users!
Content with the symbol requires Premium Membership.
|TAX CHANGES ENACTED & PLANNED: AMT; CAPITAL GAINS RATES; TAX CREDIT|
We immediately update our content for any new laws, and also mention proposed legislation that is likely to be adopted. Amid the many tax law changes that have been enacted or proposed during the first few weeks of President Barack Obama's term, we highlight below some of those with broader application to stock compensation. We are closely following all of these developments, including restrictions on stock grants to senior executives at financial institutions receiving government assistance.
1. The American Recovery and Reinvestment Act (ARRA), which became law in February 2009, contains the latest patch for the alternative minimum tax. The AMT income exemption amounts for tax year 2009 are $70,950 for married joint filers and $46,700 for single filers. These amounts are important for anybody who exercises incentive stock options (see the FAQ on the AMT calculation). This is the earliest in the legislative calendar that an annual AMT patch ever been enacted: over the past few years, the annual patch has resulted from a scramble late in the year. Also, the federal budget proposed by President Barack Obama assumes, for the first time in any federal budget, that Congress will approve an inflation-adjusted AMT patch every year.
2. For taxpayers who have very high incomes, the extension of the AMT income exemption amounts offers no effective AMT reduction. The AMT exemption is phased out by 25 cents for every dollar of AMT income. For married joint filers, this phaseout range starts at $150,000 of AMT income and completely phases out at $433,800; for single filers, the phaseout range starts at $112,500 and is eliminated completely at $299,300. See related FAQs on strategies to minimize AMT and on planning when you cannot avoid AMT.
3. ARRA has a little-known provision that reduces the capital gains rates for qualified small business stock issued between February 17, 2009 (the date of enactment), and the end of 2010! For stock held at least five years, the provision increases the exclusion on the sale gain from 50% to 75%. This provision is under Section 1202 of the tax code, using a 28% capital gains rate that applied when the original exclusion was adopted back in 1993. Therefore, the result is a 7% capital gains rate for sales of this type of stock. See the article Techniques To Defer Or Reduce Taxes On The Sale Of Your Company's Shares (Part 1).
4. ARRA also introduces a tax credit that is available in 2009 and again in 2010. W-2 employees will receive the credit through a reduction in regular withholding (not through your tax return or by a check from the government, as with the 2008 tax rebate). The credit is the lower of either 6.2% of your income or $400 ($800 for married joint filers). Like all credits and deductions, there is a phaseout for higher incomes (starting at $75,000 for individuals and $150,000 for married people filing jointly).
Some people, including those with a big enough spike of income from stock compensation, may end up paying taxes on the credit with their tax returns. When it considers withholding adjustments for the credit, your company will determine your eligibility according to your regular salary income at that time. However, you may also have income from stock compensation that ultimately pushes your MAGI for the tax year out of the credit range, making you ineligible. Companies also do not consider any earnings of your spouse (including stock compensation) that may put your combined income above the credit threshold.
To remedy this situation, you may want to adjust your withholding by filing a revised Form W-4 to ensure enough tax is withheld. While this would not apply to withholding rates for supplemental income (such as NQSO exercises or restricted stock vesting), it would adjust your salary withholding. For more details on the credit, see the relevant FAQ on myStockOptions.com.
5. Under the budget proposed by President Obama, the top marginal and capital gains rates for individuals will go up. Starting in 2011, the 33% marginal income tax rate will rise to 36%, the 35% rate will increase to 39.6%, and the capital gains rate will jump from 15% to 20%. Therefore, now may be a good time for you to re-evaluate your financial-planning strategy for equity compensation and company stock holdings to determine whether action is required before new rates apply. For details, see the article How Tax Rate Changes Impact Strategies For Stock Options & Restricted Stock, by Stan Trotta and Robert Gordon.
|SELF-STUDY COURSE ON RESTRICTED STOCK, RSUs, AND PERFORMANCE SHARES FOR CEP CONTINUING-EDUCATION CREDIT|
We recently developed a self-study online training course using our content on restricted stock, RSUs, and performance shares. This is a new benefit of Premium Membership and is available to subscribers now without any additional cost. Click on CEP Continuing Education Credit at the left side of the home page and sign in (or upgrade) to take the course, which you can complete over several visits to our site. Certified Equity Professionals (CEPs) who score 70% or better in the exam at the end of the course can earn five credits for CEP continuing education.
We also have a quiz offering continuing-education credit for Certified Financial Planners (CFPs). With links to articles and FAQs from the answer keys, our other interactive quizzes on the home page and elsewhere on the site can serve as e-learning courses and introductory gateways into our vast library of content.
- Premium Memberships in bulk at discounted subscription rates
- Licenses for our Knowledge Center of content and tools, which can be easily integrated into HR and compensation portals and stock plan service providers' websites. Our resources are particularly useful for educating employees and executives who are new to restricted stock/RSUs, for the approach of key vesting dates, or for tax season.
- Pro Memberships for financial and wealth advisors who want to track and model for multiple clients
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