Employee Stock Options for Widow

[BobFromRox]

BIL died in 2017. He left 600 shares of mega-corp stock options from 2009 which expire in November 2018. His widow, my sister, has the option of exercising option to buy at $12. Current stock price is near $66. Her taxable income in 2018 will be the capital gain from the sale of this stock and some interest income. Most likely will take standard deduction of $12000 in tax year 2018. What is the cost basis and will the capital gains be taxed at 15% rate.

Also, is she eligible for a spousal IRA of $6500 for 2017. She did not work in 2017. He filing status is married filing jointly on her 2017 tax return.

Thanks for any info. I am a long time reader but seldom poster.

 

[JoeWras]

BIL died in 2017. He left 600 shares of mega-corp stock options from 2009 which expire in November 2018. His widow, my sister, has the option of exercising option to buy at $12. Current stock price is near $66. Her taxable income in 2018 will be the capital gain from the sale of this stock and some interest income. Most likely will take standard deduction of $12000 in tax year 2018. What is the cost basis and will the capital gains be taxed at 15% rate.

Also, is she eligible for a spousal IRA of $6500 for 2017. She did not work in 2017. He filing status is married filing jointly on her 2017 tax return.

Thanks for any info. I am a long time reader but seldom poster.

This is a complex situation, and any advice given here should be taken as best effort, and not gospel. Ultimately, she should consider at least a 1/2 hr consultation with a CPA or EA when or if planning taxes.

That said, let me give you my guess. First of all, you need to know what kind of option it is: ISO or NQSO? I'm going to assume NQSO. An ISO option is a whole different tax matter, and one that should definitely be consulted on.

If it is NQSO, and she sells them now in a same day sale, I'm pretty sure she will create $32,400 in ordinary income. That's 600x(66-12). No, not capital gains. Options create ordinary income. Gains only come if they are bought, held beyond the day and then sold later. Or, if it is an ISO, there are some complex rules.

My reading shows there is no concept of step up basis for NQSOs. But again, I'm no CPA or EA.

So for a "swag", she should consider a $32k income element in her planning. For truth, always best to consult with a pro.

 

[RobbieB]

Can she buy the shares for $12 now and sell in a year to make them long term?

 

[JoeWras]

Can she buy the shares for $12 now and sell in a year to make them long term?

NQSO options don't work that way.

 

[Dash man]

Can she buy the shares for $12 now and sell in a year to make them long term?

She can buy the shares and hold on to them, but she has to pay ordinary tax rates on the difference between the cost basis and the date the options are exercised. Then if she held on to the shares for a year she could sell and pay long term rates on any additional gains since the day of sale. No way to avoid paying the tax, and in our case they also took out payroll taxes. Most people sell the shares to help pay the taxes. The sale is reported on a W-2, but it could be a 1099 misc for a spouse...not sure on that one.

 

[MichaelB]

There might be a step up in cost basis for the options. There would be for stock, not sure why options would be different. I'm not a tax expert but the possibility of a step up would certainly justify paying someone qualified to look at this.

Edit to add - this is a very specialized area and it would not be a surprise if many tax preparers don't know the answer. I'd be sure to verify this expertise exists before hiring one.

 

[Dash man]

There might be a step up in cost basis for the options. There would be for stock, not sure why options would be different. I'm not a tax expert but the possibility of a step up would certainly justify paying someone qualified to look at this.

The options are considered compensation, so I doubt there is a step up. But it never hurts to check.

 

[JoeWras]

There might be a step up in cost basis for the options. There would be for stock, not sure why options would be different. I'm not a tax expert but the possibility of a step up would certainly justify paying someone qualified to look at this.

Edit to add - this is a very specialized area and it would not be a surprise if many tax preparers don't know the answer. I'd be sure to verify this expertise exists before hiring one.

Yes. Hence my suggestion for an EA (enrolled agent) or CPA. NQSOs don't follow the normal basis rules.

The govt. really wants to get that ordinary income element.

This CPA doesn't think there is a step up. What happens to NQSO's when the holder dies?Michael Gray CPA, Stock Option Advisors

 

[Dash man]

DW is an expert in this area, but unfortunately is away taking care of her mom. I’ll try to remember to speak with her when I have the chance.

 

[cathy63]

Here's a good article: Transferable Employee Stock Options - FindLaw

If an employee dies holding unexercised employee stock options, the value of the option at the time of death (i.e., the difference between the fair market value of the shares and the option exercise price) will be included in the employee's estate and subject to estate tax. (IRC §2031.) Typically, following the employee's death, the options may be exercised by the executive's estate or by his or her heirs. 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. (IRC §421(a)(1),(c)(3).) A subsequent sale of the shares will generate capital gain or loss. 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. (IRC §83 (a).)