California tax forms
(3)Typically, following the employee''s death, the options may be exercised by the executive''s estate or by his or her heirs. california tax forms Federal income tax. In either case, the income tax consequences upon exercise after the employee''s death depend on whether the option is an ISO or an NSO. In the case of an ISO, exercise will not generate taxable income and the purchased shares will have a tax basis that "steps up" to their fair market value at the time of the executive''s death. (4) A subsequent sale of the shares will generate capital gain or loss. california tax forms Tax calculator payroll. In the case of NSOs, exercise will trigger ordinary income measured as the difference between the fair market value of the shares at the time of exercise and the option exercise price, subject to a deduction for any estate tax paid with respect to the NSO. There is no step up in the tax basis as the result of the employee''s death. (5)As mentioned above, however, ISOs are not transferable during the employee''s lifetime. california tax forms Tax-deductions. Since ISOs do not present the same estate planning opportunities as NSOs, this discussion is limited to the transferability of NSOs (including ISOs that become NSOs as a result of an amendment to permit transferability or as a result of an actual option transfer). A transfer of employee stock options out of the employee''s estate (i. e. , to a family member or to a family trust) offers two main estate planning benefits: first, the employee is able to remove a potentially high growth asset from his or her estate; second, a lifetime transfer may also save estate taxes by removing from the employee''s taxable estate the assets that are used to pay the income and gift taxes that result from the option transfer. At death, estate taxes are computed on the basis of the decedent''s gross estate prior to the payment of taxes. In other words, estate tax is paid on the portion of the estate that is used to pay estate taxes. For example, if the decedent''s taxable estate is $1 million and the estate tax is $300,000, the estate will have paid estate taxes on the $300,000 used to pay the tax. By removing from the decedent''s taxable estate assets that will otherwise be used to pay the tax, only the "net" value of the decedent''s estate is taxed at death. If the employee transfers options and incurs gift and later income taxes as a result (discussed below), the ultimate estate tax burden is reduced. GIFT TAX CONSIDERATIONSA transfer of property by way of gift is subject to the gift tax rules. These rules apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. (6) For gift tax purposes, an option is considered property. (7)Valuation. When an option is transferred by way of gift, the amount of the gift is the value of the option at the time of transfer. The gift tax regulations provide that the value of property for gift tax purposes is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both being reasonably knowledgeable of the relevant facts. (8)Applying this standard to NSOs is particularly challenging given their unique characteristics. Moreover, there does not appear to be any IRS precedent for valuing NSOs for gift tax purposes, and it is not clear how the IRS would value an NSO upon audit. (9) The restrictions and conditions that are typically imposed on employee stock options, such as limits on transfer, vesting conditions and expiration provisions tied to employment should support a lower valuation than traded options, especially if the option transfer occurs shortly after the option grant date when the option is unvested and the option "spread" is minimal (or nonexistent). While recent refinements to option valuation methodology for SEC disclosure and financial accounting purposes might be helpful,(10) an employee who wishes to transfer an NSO should be prepared to defend the option valuation used for gift tax purposes and should consider obtaining an independent valuation. Complete Gift Requirement. To be an effective transfer, the gift must be complete. (11) A gift is incomplete if the donor retains any power over the disposition of the gifted property after its purported transfer. (12) Thus, for example, an option transfer to a typical revocable "living" trust is considered incomplete. The IRS has addressed the gift and income tax consequences of an employee''s transfer of an NSO in a series of private letter rulings beginning in 1993. (13) In these rulings the IRS determined that the employee''s transfer was a completed gift for gift tax purposes.
California tax forms
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