ISO Disqualified Disposition

[S T]

I have a t/p that exercised an ISO which is noted as a disqualifying Disposition.
Employer included the amount in Box 1 on the W-2, but did include in the State Wages Box 16.

I have the 1099B and I am clear on completing the Sched D to match 1099B adding the amount included in wages as the cost.

How do I report to the State? (Calif) as wages? or on Schedule D?



Thanks,

Sandy

[JCH]

My initial thought would be why box 1 wages don't equal state wages. I haven't done a California resident return with a W-2 and an ISO in a long time, but I've never encountered this with other ISO returns I've prepared. Is it possible the W-2 is incorrect for state wages?

[S T]

No I don't think so

I looked up the EDD rules for payroll reporting, and the employer does not have to include as State wages, gain from the sale is capital gain and not wages and not subject to employment taxes.

I have also have not seen an ISO that was NOT included in State Wages.

Sandy

[JCH]

I'm having trouble following you. Are saying state wages on the w-2 do NOT equal box 1 wages?

[DTS]

I looked up the EDD rules for payroll reporting, and the employer does not have to include as State wages, gain from the sale is capital gain and not wages and not subject to employment taxes.

I have also have not seen an ISO that was NOT included in State Wages.

Sandy

So, what to do about this in the future? I'm working on one right now and they match. Option numbers are about 240K. That's some state tax!

D

[S T]

Here are the numbers

W-2 form from employer

Box 1 Wages 42,152.76 (includes the 18,830 ISO gain)
Box 3 SS 24,382.83 and corresponding correct amount in box 4
Box 5 Mcare 24,382.83 and corresponding correct amount in box 6

Box 16 State Wages $23,322.76 (employer excluded the $18,830 from State Wages, per the Calif EDD instructions)

No notation in box 12a or box 14 only on the ADP Earnings Summary with an additional Stock breakdown sheet provided by employer. Note: ISO Disqualifying Dispositions
Total Price $ 7,420, Total Value $26, 425, Adjusted Sales Price $ 26,250 - W-2 Income $18,830

Information for Calculation of Alternative Minimum Tax safe info, except W-2 Income is -0- and Adjustment for AMT is $18,830

Sandy

[JCH]

I'm stumped, but this could be my lack of familiarity with CA resident returns. Why would the ordinary income from the disqualified position included as wages in box 1 not be taxed as ordinary income to the state resident? Doesn't make sense to me.

[S T]

Well maybe someone will know

I am stumped as well, has to do with payroll reporting in Calif, but still should be included as income on Calif.

I just don't know how to enter on my computer software, additional wages or Schedule D.

California does not recognize capital gain, so it is all ordinary income.

Sandy

[S T]

Franchise Tax Board

I finally resorted to calling FTB and found that California starts with Federal AGI then makes adjustments to add or subtract.

Since the ISO amount is included in Federal AGI, California automtically calculates and an adjustment does not need to be made for the wage difference in Box 16.

Sandy