Secrets of Tax Planning for Employee Stock Options, 2018 Edition


Secrets of Tax Planning for Employee Stock Options, 2018 Edition

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Secrets of Tax Planning for Employee Stock Options is now updated for the Tax Cuts and Jobs Act of 2017, enacted last December and mostly effective at the beginning of 2018.

Could this happen to you?

"In January, 2000 I exercised the majority of my shares of a pre-IPO company that eventually went public. My strike price on these shares ranged from about $1 to $8, and I exercised all these shares (when the fair market value was) around $129. My intention was to hold them until at least January 2001, which would have qualified these stocks for the "2 year, 1 year" rule and would qualify for long-term capital gains."

"Well, you can probably guess what happened next. My stock is hovering at about $40. To my understanding, if I hold the stocks into next year, I would have to pay AMT on the stock at $129. Well, basically, I would have to sell all the stock just to be able to pay the AMT consequences."

This is part of a letter we received from one of our newsletter readers. Many employees who have been granted stock options discover, too late, they had been handed a loaded gun that they accidentally shot themselves with.

After the market crash in 2001, I attended a "town hall" meeting where options holders shared their experiences of emotional distress so severe that they lost their hair. They were also afraid of going bankrupt and losing their homes.

Who is Michael Gray, CPA?

My name is Michael Gray. I'm a certified public accountant (CPA). Back in 1985, I assembled a study about the tax consequences of different employee stock options and made a presentation on the subject for the tax partners and managers of a national CPA firm, and I've continued to advise clients in this area ever since.

I am the principal author of a monthly newsletter, Michael Gray, CPA's Option Alert, author of Secrets of Tax Planning For Employee Stock Options and Executive Tax Planning For Employee Stock Options, and the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire.

Because of the many questions we are receiving from our readers, we know people with options need help but often haven't been able to find it from their local tax advisors. Some have been getting erroneous advice from their advisors but have no way to know if that advice is reliable or not. Following erroneous advice can result in thousands, sometimes millions of dollars in additional taxes and penalties.

I have just updated a comprehensive explanation, Secrets of Tax Planning For Employee Stock Options 2014 Edition.

Like having a personal consultation with an expert on planning for employee stock options.

Reading this material is like sitting across the table from me in a consultation, at a fraction of the investment. My consultation fee is $500 an hour. I invested hundreds of hours in assembling this material for you. If we were conservative and said you received ten hours of advice, the value would be $5,000. But the total investment is less than the cost of one hour. More importantly, the information in this material could save you (or your clients) thousands, possibly millions of tax dollars and penalties!

"Michael Gray's book on tax planning for stock options, stock grants and ESOPs is a must have for any tax professional working with clients who have such assets. It has to be the most complete discussion and guidance available for all the nuances of the myriad tax rules that apply, including the AMT and its confounding carry over credits. He uses example after example to aid the reader in comprehending the tax consequences of every possible situation. I say this as a tax attorney with over 40 years of experience in Silicon Valley."

John Hopkins, Esq.
Hopkins & Carley
San Jose, California

What's included

Secrets of Tax Planning for Employee Stock Options includes explanations of employee (and independent contractor) planning for Incentive Stock Options, Non-Qualified Stock Options, Employee Stock Purchase Plans, Stock Grants and Employee Stock Ownership Plans (ESOPs).

While each of these types of plans represent significant benefits for employees (non-qualified options are also available for non-employees), they also include tax traps that can result in a huge tax without having the cash to pay it.

I have included, word for word, my initial consultation presentation explaining how incentive stock options work.

Also, I have included step-by-step examples illustrating various concepts.

What's been updated?

The 2014 book includes updates relating to the Net Investment Income Tax and estate and gift tax rules. Considerations for avoiding penalty taxes relating to violating the non-qualified deferred compensation rules under Internal Revenue Code Section 409A are also included.

Here are some of the subjects discussed:

Incentive Stock Options

  1. What are four alternative scenarios to consider when evaluating risk and tax results when planning?

  2. What is the "escape hatch" and when should you use it?

  3. What tax rates apply in different scenarios, and how do they relate to evaluating risk?

  4. What are the mechanics of the alternative minimum tax and the minimum tax credit?

  5. What is the status of the refundable minimum tax credit?

  6. How can the estimated tax rules be used to manage cash flow?

  7. What are the tax results of "hedging" strategies?

  8. What are special considerations when an early exercise is allowed?

  9. What special considerations apply for "insider" stock?

  10. What are the tax consequences of backdating ISOs?

Non-Qualified Stock Options

  1. What general rules apply when non-qualified stock options are exercised?

  2. When is stock considered "restricted", and what special elections apply in those situations?

  3. When do you make a "Section 83(b)" election?

  4. What are the tax consequences of a forfeiture after a Section 83(b) election has been made?

  5. How can non-qualified stock options avoid severe penalties for non-qualified deferred compensation plans under Internal Revenue Code Section 409A?

  6. What are the tax consequences of backdating employee stock options?

Employee Stock Purchase Plans

  1. How does an employee stock purchase plan compare to incentive stock options?

  2. Does the alternative minimum tax apply to ESPPs?

Stock Grants

  1. How is a stock grant taxed?

  2. When would you make a Section 83(b) election for a stock grant?

  3. What are state tax consequences when an employee moves?


  1. What are employee benefits of ESOPs?

  2. What are the tax breaks for a sale by an existing shareholder to an ESOP?

  3. What diversification elections are available for employees?

  4. What are the distribution requirements after an employee retires?

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