Discussion:ISO Option exercise shows as untaxed income?
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Discussion Forum Index --> Tax Questions --> ISO Option exercise shows as untaxed income?
| 10 April 2008 | |
| Should the exercise of ISO options (but no sell) result with an income increase in Box 1 of the W-2 but no other details on the form? It appears that the W-2 may be incorrect since there is no visible reason there was a larger dollar amount without being taxed.
Should there be an additional form provided by the employer or do I need to file an additional form? Thanks. | |
Southparkcpa (talk|edits) said: | 10 April 2008 |
| It sounds like your facts are wrong. A PURE ISO results in NO FICA or MC tax and will show as LARGE federal wages.
You will need to show this on schedule D as well. Lot's of good threads on this topic. You stated that it was exercized but not sold. That would NOT be on a W2. That would result in the client now OWNING the stock in his brokerage account. If you ask your client you will find that he did not buy the stock (if so, ask to see the account statement where the shares are held). | |
| 11 April 2008 | |
| Thanks for your quick reply. Are you saying that if the shares WERE purchased, held on paper by the option grantee - it should not have shown up on the W2?
I have seen both and it is as I described. The one reason this might have happened is that the employee is a US Citizen working in the US for a US division of a Canadian company and granted Canadian stock. I'm not sure if they knew how to categorize it. It sounds like the W-2 is wrong. Anyone agree/disagree? | |
| 11 April 2008 | |
| ISO exercised but not sold would have an AMT effect. ISO exercised and sold would show on the W-2, no fica. | |
| 11 April 2008 | |
| I take this to mean that the unrealized profit should not have shown up as income on the W-2. Correct?
The stock has not yet been sold so therefore it should not be shown as income on the W-2...yes? (even though it does) I know it sounds like I keep asking the same question but no one has said that the W-2 might be wrong (except me). Does anyone think the W-2 might be wrong? Again - thanks to all for the help. This is a great forum. | |
Southparkcpa (talk|edits) said: | 11 April 2008 |
| My gut feeling is that YOU and YOUR CLIRNT are wrong and the W2 is correct. BIG companies that have ISO's rarely screw this up. Joann is 100 percent correct. In your case, the story appears to be that the client exercized the ISO's and took the cash. Thus NO AMT but W2 income with no fica. ASK YOUR CLIENT!!!! DID HE GET A BIG CHECK OR STOCK? HOW DIFFICULT IS THAT TO DO ? | |
| 11 April 2008 | |
| I agree with southpark. A lot of times when people same day exercise sale they get it screwed up. Did you ask for the transaction documents for the exercise? That should tell you everything. | |
| 11 April 2008 | |
| Wow - I feel like I'm being called stupid. I thought I made it clear in my 1st follow-up.
I've seen the stock certificate in hand AND the W-2 - the shares have not been sold - they are right in front of me. The W-2 shows no extra details regarding any stock options - only that the income has an extra ~$50,000 that shows as untaxed. Could the fact the the shares were taken in paper form and not transferred to a brokerage have caused this? And the transaction documents show that it exercised last July but there is nothing about a sale (because they weren't sold). Again - thanks for the posts. Hopefully this will end the doubting of the exercise-only of the ISO. | |
Death&Taxes (talk|edits) said: | 11 April 2008 |
| Some firms give detail on the final paycheck or give separate ISO statements. You and the client need to call the employer's payroll department, or human resources. It is hard to believe this has not happened before with them or that this is the first person to exercise and hold, but maybe that is what happened, and that they are used to doing it one way.
I think you have a valid point, but is it possible this is Restricted Stock? | |
| 11 April 2008 | |
| It's possible that your client made an 83b election, or that the stock is restricted stock. I had a similar situation with I client I reviewed yesterday - restricted stock with 83b election, and the spread shows on the W-2 in Box 1. She didn't sell the stock until months later, at a loss unfortunately. Check with them about the 83b election. | |
| 11 April 2008 | |
| Thanks D&T - the HR department at the company is also investigating. It's a little slow going since they are more familiar with Canadian processes. They did confirm however that the options were an ISO (that was my first question to them). | |
| 12 April 2008 | |
| Thanks to everyone that responded. I will post a follow-up to this thread once I find the final outcome. As Southparkcpa stated earlier, there are many good threads on this subject. I only posted my question because I hadn't found one about options that had only exercised. The first 15 I read all stated they sold within the first year.
I am now curious about the filing side based on the link TexCPA posted. The line states "For regular tax purposes, you don't report any income on the exercise of the incentive stock option." If the W-2 that was sent to the IRS already shows it as income, how would one not report it? | |
Death&Taxes (talk|edits) said: | 12 April 2008 |
| If it is incorrect, you might have to extend and wait for a corrected W-2, or at least a letter stating such from the employer. | |
