stock options

[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!

[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]

Correct

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

[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

[Possi]

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.

Nope, you have the right forum.

Thanks for all your help!

[DaveinTexas]

Precisely why they call

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.

[Possi]

I get the concept, but...

it looks like he is getting over-taxed.

Adding the option of $36k on the 6251 page adds $7692.00 to his tax liability! On stocks he didn't sell! Then, he might get a credit when he sells them? What?

He is not itemizing, so all of his income is being taxed to the max, no dependents, no deductions, so AMT didn't kick in because he is already paying the max.

I just need to be sure this is right. I'm afraid I'm doing something wrong. Not that I'm getting bad advise, not at all, but that I might be leaving something out since you can't see the entire tax return.

[DaveinTexas]

Gary2

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

Also, he is correct in stating your client may be able to take an AMT credit (non-refundable in this case). To accomplish this you must track the dual basis of the shares, the federal tax basis (cash outlay) and the AMT basis (the bargain element or amount entered on line 14 of the 6251).

Once the stock is sold, there may be a difference in the gains when you figure the gains using both bases. The difference in the two gains, will act as a negative adjustment on the 6251 in the year of sale. This could potentially lower your client's AMT liability (if any) for that year. If there is no AMT liability, the negative adjustment may create a non-refundable credit.

I better stop because I will just further confuse the issue and I know Gary will probably want to add or subtract to my post This is a highly complex area, in my opinion, so a bit of research will go a long way. IRS pubs do a poor job of explaining this transaction. I recommend you look into websites that discuss this info such as Fairmark.com; great resource for ISO and AMT information. Please don't rush through the calculations, take your time with this, get it right and after doing it about 100 times you may just get the hang of it

[John of PA]

There is no tax on the ISO until the shares are sold. It is a AMT tax preference in the year exercised.

[Gary2]

Your instructions made me look at the 6251 closely, and line 14 addresses the ISO's exercised, BUT I do not understand what it is asking for on that line. Is there even an entry to be made since he is not reducing his taxable income by any deductions (like itemized deductions), but is paying taxes on the whole enchalada?

I would never have even looked at that form if not for this post. I had no idea that exercising options and not selling them could possibly trigger more tax burden. Maybe I'm misunderstanding it all.

Based on the information so far, the entry on that line would be $36,000 (based on exercising 6,000 options with FMV of $15, exercise price of $9).

The exercise of an ISO is an AMT deferral item. If the options hadn't been qualifying, then the recipient would have paid tax on the discount immediately, as wages. Since the options qualify as ISO, the regular tax is deferred, but the AMT limits how much can be deferred. On the other hand, the AMT can result in a credit when they're sold (which is why AMT doesn't apply to shares that are exercised and sold in the same year).

[FEDUKE404]

Issues to resolve

The sale was not related to these particular stock options. The sale was for other stock options taken in earlier years. I have the 2010 tax return, and there is no indication of AMT or a form 6251 being used. His income was half what it is for 2011.

TP does not itemize, but takes the standard deduction. Without inputting the stock options exercised (because these options were not sold) there is no triggering of the 6251.

Your instructions made me look at the 6251 closely, and line 14 addresses the ISO's exercised, BUT I do not understand what it is asking for on that line. Is there even an entry to be made since he is not reducing his taxable income by any deductions (like itemized deductions), but is paying taxes on the whole enchalada?

I would never have even looked at that form if not for this post. I had no idea that exercising options and not selling them could possibly trigger more tax burden. Maybe I'm misunderstanding it all.

It appears you have two separate issues:

1) Sale of a stock with unknown basis, sold in 2011 and possibly (probably) bought at a discount via stock options. Your biggest challenge will be determining the true cost basis of that stock, which likely is not what he "paid" for it.

2) Exercise of option in 2011 ("date exercised 04-19-11"). If I read your message properly, that "new" stock remains unsold. There may be some AMT issues, and be sure you carefully scrutinize any W2s for relevant information.

Oh yes: While unlikely, at least be careful you do not have to deal with any wash sale issues!

Good luck!

FE

[Possi]

Form 6251 triggered by options?

not[/i] related to this, then you don't have to report anything on Schedule D for this, but you do have to treat it as a preference item for AMT purposes. At $36K of deferral, there's a decent chance it will trigger AMT.

The sale was not related to these particular stock options. The sale was for other stock options taken in earlier years. I have the 2010 tax return, and there is no indication of AMT or a form 6251 being used. His income was half what it is for 2011.

TP does not itemize, but takes the standard deduction. Without inputting the stock options exercised (because these options were not sold) there is no triggering of the 6251.

Your instructions made me look at the 6251 closely, and line 14 addresses the ISO's exercised, BUT I do not understand what it is asking for on that line. Is there even an entry to be made since he is not reducing his taxable income by any deductions (like itemized deductions), but is paying taxes on the whole enchalada?

I would never have even looked at that form if not for this post. I had no idea that exercising options and not selling them could possibly trigger more tax burden. Maybe I'm misunderstanding it all.

[Gary2]

My new client has a 1099B for $24,495.00 that has no basis or any other information.

He also has a form 3921 Exercise of an Incentive Stock Option Under Sect 422(b) that

ISOs are a type of employee stock option, which are a very different beast from the publicly traded stock options described in the base note. Thus this really belongs in a different thread, but since it's here, I'll continue.

reflects
date granted 4-19-06
date exercised 04-19-11
exercise price per share $9
FMV per share $15
No of shares 6,000

This is a notice about the exercise of ISOs, and thus is used to establish the basis. Although it's not about the sale, there is frequently an associated sale of some or all of the stock when an ISO is exercised. In this case, the numbers from the 1099-B don't match a total sale unless the stock took an incredible nosedive.

If I understand this, his cost is $9x6000sh
his SV is $15x6000sh
Long term

Not exactly, not sure what you mean by "SV", and no.

You didn't give a sale date, but since the exercise date was 4/19/11, and assuming the 1099-B really is for the same shares, it's a short term, non-qualifying disposition.

In a non-qualifying disposition, the difference between cost and FMV is added to ordinary income and becomes part of his basis. Thus, for the shares that were actually sold, his basis is $15/share. You may want to confirm that the $6 difference really was added to his income.

If the sale is not related to this, then you don't have to report anything on Schedule D for this, but you do have to treat it as a preference item for AMT purposes. At $36K of deferral, there's a decent chance it will trigger AMT.

I believe the 1099 B is not reflective of this transaction although it is from the same company (family owned very large corporation).

Given the numbers, it's most likely a sale from an earlier exercise. The 3921 is relatively new, so you may need to have the client find other paperwork with similar info to establish the basis. You may also need to check back tax returns, to see if there's any AMT credit recovery.

I say this because $25K isn't enough to cover the entire cost of a cashless exercise, it's certainly not enough to be the total sale (unless the stock took a nosedive), and there's no reason to compel a partial sale.

[Possi]

1099b And Stock Option Statement

My new client has a 1099B for $24,495.00 that has no basis or any other information.

He also has a form 3921 Exercise of an Incentive Stock Option Under Sect 422(b) that reflects
date granted 4-19-06
date exercised 04-19-11
exercise price per share $9
FMV per share $15
No of shares 6,000

If I understand this, his cost is $9x6000sh
his SV is $15x6000sh
Long term

I believe the 1099 B is not reflective of this transaction although it is from the same company (family owned very large corporation).

Validation please?

[oceanlovin'ea]

Thanks

Thanks guys. I did enter it as a short term loss but I wanted to make sure before I transmitted it.
He already has a huge loss so he can only deduct $3000 per year. So the bottom line of the return doesn't change but I want to make sure I report this one correctly.

He did not receive a 1099-B. He went online and tried to find something and the only thing he could find was the record of the transaction.

Thanks again.

Linda, EA