stock options

[FEDUKE404]

Disagree on cashless exercise

It "phantom income". It is income that was not received (conceptually) but is income under the crazy AMT system, clearly thought up by some Nazi scientist....wrong forum, sorry.

I once had a client in this situation and when I told him he has to report the bargain element as income for AMT purposes, he left (after a brief disagreement) and never came back. He probably went to another preparer and didn't show them the 3921 stock option form.

I don't know if the IRS is catching on to these forms, my guess is we may see some CP2000's soon. Listen, we are not telling you to take our word for it, please do your homework. This type of stuff shows up a lot in my office and it may become more common because companies are more willing to offer their employees stock than bonuses because it keeps them loyal and dedicated to the end goal (higher profits), or at least that is the intention.

Start with the 6251 instructions, then when you get stuck go to the Fairmark website and forums. Your question has been asked many times, the answers are there. Also, ask your client for a W2 detail or compensation summary of some kind. It could be that your client sold these shares in a disqualifying disposition as Gary mentions, this means the gain from the excersize and sale are already reported on the W2; I call these a cashless exercise because there is no literal cash outlay by the client. I am not tryin to confuse you but you need to ensure you turn over all stones to Get the correct answer.

After reviewing the 6251 instructions, then go here for a much better explanation: http://fairmark.com/execcomp/isoexer.htm

Then if you still have further questions or doubts, visit the forums at Fairmark (I am not affiliated, I have just spent many hours researching this topic on this site...and yet I still lack confidence handling these transactions). Here is the forum you may be interested in: http://fairmark.com/forum/list.php?5

Good luck to you.

Unless my bifocals are cloudier than usual, this sale does NOT qualify as a "cashless exercise."

Re an earlier comment of Possi: "The sale was not related to these particular stock options. The sale was for other stock options taken in earlier years."

As I noted earlier in this thread, it appears there are two separate issues to be addressed, namely the 2011 stock sale and the 2011 option exercise.

FE

[DaveinTexas]

Correct

I was just reiterating to the poster to check all facts before a decision was made, nice catch. Keep me on my toes!

[Gary2]

Is right on point, as usual. I think he is a moderator in disguise, he's too good!

Thanks for the compliment, but I'm not a moderator. I just try to focus on the stuff I know well, and mostly avoid the stuff that shows my ignorance.

It "phantom income". It is income that was not received (conceptually) but is income under the crazy AMT system

I tend to reserve "phantom income" for things like PTP income that was never distributed and can't be offset with other losses.

In this case, I don't think of it as phantom, because the income was distributed, just in the form of stock instead of cash. Non-qualifying options, which are usually taxed on exercise, are really the normal case. It's the fact that it's an ISO that allows him to defer some of the tax (as well as potentially convert wages into capital gain). He could have done what employers normally force employees to do for non-qualifying stock and what many people do for ISOs, namely sell enough to cover the tax.

Or look at it this way: If a Cadillac dealer decided to give his service manager a bonus by selling an Escalade at 50% off, the service manager might wind up paying $35K to his boss to get the $75K Escalade, as well as having to pay income tax on the $35K discount that's too steep to qualify as a non-taxable employee discount, without ever having $75K of cash to deposit in the bank.

As I noted earlier in this thread, it appears there are two separate issues to be addressed, namely the 2011 stock sale and the 2011 option exercise.

This point is absolutely key to getting it right.

[DaveinTexas]

I refer to the term phantom income

Because if the stock price drops, especially to nothing, then the poor guy pays AMT tax on monies never received (a la the Internet stock bubble of the late 90's.

That reminds me, why does Facebook's stock have any value? It's their massive inventory and other capital assets...no...oh, it's their great product they sell...well no... I wish I could have thought of creating a company that doesn't really sell anything, exists in the "cyber world" and has no inventory to track...then cash in my options for millions.....nah, I would rather work for a living!

Great job again Gary..I follow your same mantra..answer only when confident about the subject matter presented.

Everyone try to stay sane for the upcoming due dates!