Stock options, exercising and holding

[CalvinHobbes]

Let me start by saying "Yes, I am an idiot for exercising and holding".

Last year I exercised a large number of ISO and NQSO options. I did an exercise to cover so some shares are sold to cover the cost of the exercise.

My income last year ballooned due to the exercise which immediately hit me with $12,000 more in taxes in addition to what was already paid through my normal withholding. So now I owe $12,000 in taxes BEFORE even accounting for the exercise. After entering the exercise information into Turbo Tax, it says I owe $45,000. It seems like I'm being taxed multiple times and then I'll probably be taxed again when I eventually sell the stock I exercised.

Am I doing something wrong? Does this make any sense to anyone?

 

[sjwaste]

If you owe that much, and presumably make that much, you really can afford a CPA. Seriously, get some professional tax advice, that's a lot of money.

 

[hiromizu]

I would recommend calling a professional accountant...

 

[spidey07]

Did you purchase the options or did you sell to cover? If the later then you're going to get taxed on the income and many times they estimate the witholdings, in my experience MORE than what they should.

 

[CalvinHobbes]

First, I don't make that much money. It's only the exercise of the options that made it seem like my yearly income is twice what it should be.

I've spoken to one accountant and he charges $1,700 do do a return like this. That is a lot of money unless he's going to save me a lot more than that.


Spidey07,
I exercised to cover. From what I have been reading ISO options should have a tax benefit and not a massive penalty.

 

[hiromizu]

Originally posted by: CalvinHobbes
First, I don't make that much money. It's only the exercise of the options that made it seem like my yearly income is twice what it should be.

I've spoken to one accountant and he charges $1,700 do do a return like this. That is a lot of money unless he's going to save me a lot more than that.


Spidey07,
I exercised to cover. From what I have been reading ISO options should have a tax benefit and not a massive penalty.

Point is, better to spend that amount and have a peace of mind with correct accounting versus the potential for incorrect reporting and an audit

 

[spidey07]

Originally posted by: CalvinHobbes
First, I don't make that much money. It's only the exercise of the options that made it seem like my yearly income is twice what it should be.

I've spoken to one accountant and he charges $1,700 do do a return like this. That is a lot of money unless he's going to save me a lot more than that.


Spidey07,
I exercised to cover. From what I have been reading ISO options should have a tax benefit and not a massive penalty.

AFAIK it's still income and is taxed but I don't know the tax implications of different classes of options. And you're not stupid for holding if you think you got a great option price.

When you did your sell to cover taxes should have been witheld, if not then you may owe taxes on it. Make sure you hold onto them for longer than a year so you don't get raped with short-term capital gains. (go go bush capital gains tax cuts, you'll only have 15% long term!!!!)

Or you could just call up the brokerage company that handled your options, they should know what's up.

 

[Squisher]

We exercised stock options and also sold stock outright along with the sale of a house and the buying of a new house. A CPA charged us $250 to do our return. Oh yeah, we also take a deduction for a home office and a number of business expenses.

btw-it sounds like you did something wrong in TurboTax unless you were walking around with $120K+ in your pocket last year.

 

[FoBoT]

people with complex tax situations should use the services of a tax professional, IMO

 

[DaveSimmons]

For NQSO the spread between purchase and sale is treated as ordinary income, so it will be taxed at a very high rate (like wages, but this will be added to them and taxed in your highest bracket), according to this:

http://www.smartmoney.com/tax/...cfm?story=options_nqso

If you're being taxed twice it's because you're using the wrong basis for the sale part, or because you're confusing witholding as taxes. You list the witholding at the end of your return as a credit, to cancel out that amount of the taxes.

Say the option is 10 cents and you're selling at $1.10:

1. You get $1 in ordinary income for every share bought
2. The shares you sell immediately have a basis price of $1.10 (since you covered the spread in step (1)) so your capital gains are $1.10 - $1.10 basis) = $0 / share.

I haven't found a good web reference for incentive stock options yet.

 

[DaveSimmons]

and then I'll probably be taxed again when I eventually sell the stock I exercised.

Yes, but only on the price difference / growth since when you bought and held. Your basis is the market price when you exercised the options, not the option price.

If you wait long enough you'll only be taxed at the 15% long term captial gains rate for the difference / growth.

 

[bsobel]

When you did your sell to cover taxes should have been witheld

For NQ, not for ISOs....

 

[CalvinHobbes]

Taxes were withheld for the NQ but not the ISO. I could have sworn I selected to pay the taxes at the time of exercise with the ISO options.

Thanks for all the responses.

 

[imported_Lothar]

Originally posted by: FoBoT
people with complex tax situations should use the services of a tax professional, IMO

That's why he created this thread.
Paging CPA and EagleKeeper...

 

[Gothgar]

yeah, in your case I would def seek out a professionals advice

 

[Orsorum]

Call a Maryland CPA. Seriously. If you need a referral CPA or Eaglekeeper may know someone; I haven't been in practice long enough to know any Eastcoasters.

 

[Fern]

Originally posted by: CalvinHobbes
Let me start by saying "Yes, I am an idiot for exercising and holding".

Last year I exercised a large number of ISO and NQSO options. I did an exercise to cover so some shares are sold to cover the cost of the exercise.

My income last year ballooned due to the exercise which immediately hit me with $12,000 more in taxes in addition to what was already paid through my normal withholding. So now I owe $12,000 in taxes BEFORE even accounting for the exercise. After entering the exercise information into Turbo Tax, it says I owe $45,000. It seems like I'm being taxed multiple times and then I'll probably be taxed again when I eventually sell the stock I exercised.

Am I doing something wrong? Does this make any sense to anyone?

Firstly, looks to me like this should have posted in the tax thread at the top.

Secondly, you don't provide enough information for us to really help.

I'm a tax CPA and used to see lot of ISO's etc.

1. You need to keep the ISO and NQSO options seperate. Their tax treatment is considerably different.

2. ISO - If sold any ISO shares at the time of excercise, you have not met the required holding period. The gain on those shares is ordinary income and should have been reported on your W-2. Typically, such a large amount being dumped to wages causes excessive withholding because of the way most programs work.

The other ISO shares you still hold do not cause any (regular) income tax, but may cause you to incur AMT (alternative minimum tax). The difference between your option/excercise price and the FMV of the stock on the date of excercise is added to AMT. This is a timing differnce and will reverse out when you do actually sell the stock. You will be eligable for an AMT credit against regular income when you sell.

You should not have any captial gain on the ISO shares because their basis would equal selling price resulting a zero gain.

3. NQSO - These are generally taxable as income when granted. However certain stocks (smaller companies not on an exchange) and restrictions can change that so that the NQSO are not taxed until excercise.

I assume your NQSO's met the latter requirement (no taxation until excercise).

Here again, the amount of income is the difference between your option price and the FMV of the stock on the date of excercise. This income should have reported in your W-2 also (with income tax w/h). Again, no cap gain on any sale for the same reason as the ISO stock.

By blowing the holding period on the ISO stock sold you basically converted those sold shares in NQSO shares.

Fern