Recommend Our Site to Your Friends!

Print This Page

By Michael Gray

Happy New Year!

May all your options be up during 2002!

'Tis the season to exercise ISOs?

Remember that exercising incentive stock options early in the year can be advantageous. If the option was granted more than a year ago, the stock should meet the holding period requirements (more than two years after grant, more than one year after exercise) to be sold for long-term capital gains before the tax return is due to pay the AMT for the exercise, making cash available to pay the tax.

Since the market was so terrible during 2001, most taxpayers will have a low estimated tax base for 2002. For taxpayers with adjusted gross income for 2001 exceeding $150,000 ($75,000 for married, filing separately), the estimated tax base for 2002 is 112% of the tax on the 2001 income tax return. For many taxpayers, this means most of the AMT for exercise of an ISO during 2002 won't be required to be paid until April 15, 2003.

An additional benefit for ISO stock is that if the stock value declines steeply before the end of the year, you can use the "escape hatch." By selling the stock before the year of exercise, ordinary income is reported based on the excess of selling price of the stock over the option price. The AMT adjustment is eliminated. This ability to "look back" shortly before the holding period requirements are met is an advantage that should not be overlooked.

The advantages for exercising options early in the year are not as great when the stock is not publicly traded because the employee may find it hard to sell the stock by the end of the year or when the holding period requirements are met.

Final estimated tax payment for 2001 is due January 15, 2002

With the market gyrations last year, many people sold stock towards the end of the year. They should review their estimated tax status with their tax advisors to determine if any adjustments should be made.

Should your withholding be adjusted for 2002?

Some taxpayers made year-end withholding adjustments for 2001 and should notify their payroll departments to return to a "normal" withholding schedule.

There are other reasons for adjusting withholding, such as expected declines in mortgage interest from refinancing your mortgage.

The official form for federal withholding is Form W-4. Some states, including California, allow an employee to specify a different number of exemptions for state income tax withholding. In California I have often seen the state withholding out of line with the actual tax liability. Consider reviewing this matter with your tax advisor.

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.

To receive the next issue of Michael Gray, CPA's Option Alert with more employee stock option tax developments and answers to questions from our readers automatically via email, subscribe by filling out the form below.