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By Michael Gray

Reminder-Review Your Estimated Tax For June 15

As the stock market fizzles, many of our clients that reported significant income for 2000 are having a much quieter 2001. Since income will be down this year, many clients are not paying their estimated tax based on their 2000 income tax liability.

(For 2001, individuals who had adjusted gross income exceeding $150,000 or $75,000 for married persons who file separate returns for 2000 have a "protected" estimate if they pay 110% of their 2000 tax liability in four equal quarterly installments. Since employers will be reducing federal tax withholding because of the federal tax cut legislation, employees may need to direct their employers to increase their withholding to avoid penalties from underpayment of estimated tax.)

In this situation, it's especially important to notify your tax advisor when you have a transaction that will result in additional tax, so he or she can either set up or adjust your estimated tax payments and minimize or eliminate potential penalties.

When a taxpayer has irregular income, the penalty for underpayment can be avoided by paying estimated taxes on an annualized basis. The tax liability is computed using the year to date income and deductions for the month preceding the estimated tax payment due date, multiplied by the following factors: April, 4; June, 2.4; September, 1.5; January, 1. Once the tax is determined, multiply it by the following factors: April, 22.5%, June, 45%; September, 67.5%; January, 90%. Then subtract the estimated tax paid to date to determine the balance due for the quarter. See Schedule AI in Federal Form 2210 for a detailed worksheet.

The result of the annualized income computation is to "front load" estimated tax payments.

After reading this, you should understand why many people who use the annualized income method of computing their estimated tax payments have their tax advisors make the computations and prepare the vouchers.

No relief for "optionaires" in The Economic Growth and Tax Relief Reconciliation Act of 2001.

Congress has passed and President Bush has agreed to sign the compromise tax cut legislation. For people who are suffering the tax consequences of the stock market crash relating to their stock options, tax relief is conspicuously absent. The AMT adjustment for incentive stock options is unchanged. There are no relief changes relating to non-qualified stock options or employee stock purchase plans.

Since the tax rates are unchanged for long-term capital gains, the maximum regular tax rate is phasing down from 39.6% to 35% and the maximum AMT rate remains at 28%, more taxpayers will be subject to AMT under the new tax law.

Also, since the House of Representatives is now controlled by Republicans and the Senate is now controlled by Democrats, it may be more difficult to pass more tax legislation.

Keep working on your offer in compromise and good luck!

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

P.S.

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