Non-Qualifying and Qualifying Distributions

[jasdlm]

Client formerly worked for Netopia. Has a W2 that was issued. A 2nd W2 was issued (although not marked corrected) that was the exact same as the 1st W2 except that box 14, which was blank in 1st issue, includes $12,246.62 ISOS.

W2 Numbers are as follows: Box 1 $31,664.16; Box 3 $22,362.93; Box 5 $22,362.93; Box 12 - $15.72 life insurance, $2945.39 401(k)

Issues: According to the 'Statement of Taxable Income Stock Purchase' client brought in, Disqualifying Dispositions that should have been taxable totalled $11,368.70 (value on purchase date minus purchase price). Qualifying Dispositions totalled $12,246.62.

1) The difference between Box 1 and Box 3 is $9,301.23. This doesn't seem to fully account for the $11,368.70 in NQ Dispositions. Do I need to add the difference to the amount I enter for the taxable portion of the Box 1?

2) The Qualifying Dispositions, which are coded in what I assume is the 'corrected' W2, are listed in the W2 summary (upper right hand corner of sheet also containing 4 detachable W2 copies) as Misc. Non Taxable Comp. I thought Qualified Dispositions were taxable compensation. What am I missing? If they are not taxable, then I assume my clients basis in the sale of the stock is $0? If it is taxable, do I add it to taxable income as in #1 above? The 'Statement of taxable Income Stock Purchase' lists the qualifying dispositions as taxable.

Someone more knowledgable please help.

[jasdlm]

Anyone? I'm developing a complex. No one has responded to my last 2 posts.

[kcjenkins]

If you add the 401k amount, it will balance, Jasdim.

[jainen]

>>No one has responded to my last 2 posts<<

I read your posts, jasdlm, and learn from others, but I'm not comfortable with internet numbers detailed to the penny. I just can't respond well to that level of detail without holding the actual document in my own hands.

Your previous post about the basis of ESSP is even more so. There is no level of detail that will help me take anyone's word on stock basis. I just gotta see the papers for myself.

[joanmcq]

Qualifying dispositions for an ISO are capital gains...but there are AMT issues. His AMT basis will be higher than the regular basis, and there shoudlbe an AMT adjustment. Means he held the stock for more than 2 years and none of it should be taxed as ordinary income. The disqualifying dispositions have an ordinary income component. What's wierd is that the qualified dispositions amount was apparently added to wages, and the disqualifying wasn't.

Don't mix DISqualifying dispositins, with NONqualified stock options. Totally different animals.

[jasdlm]

Thanks to all of you! I am truly grateful. (Even though I feel stupid that KC had to figure out the math for me . . . sheesh.) I will keep my nose in the research material and figure this out. It seems that I should ignore the bit on the W2 summary that says 'nontaxable compensation'. I was very suspicious about it; I couldn't figure out why it wouldn't be taxable.

Thanks again. I really appreciate thie guidance. Jainen, thanks for your honesty. I appreciate your knowledge. You remind me of my finance professor in graduate school. He was tough as nails, but I learned more from him than anyone else I studied with during my entire undergraduate, graduate, and law school tenure.

[Linda Mathey]

Thanks to all of you! I am truly grateful. (Even though I feel stupid that KC had to figure out the math for me . . . sheesh.) I will keep my nose in the research material and figure this out. It seems that I should ignore the bit on the W2 summary that says 'nontaxable compensation'. I was very suspicious about it; I couldn't figure out why it wouldn't be taxable.

Thanks again. I really appreciate thie guidance. Jainen, thanks for your honesty. I appreciate your knowledge. You remind me of my finance professor in graduate school. He was tough as nails, but I learned more from him than anyone else I studied with during my entire undergraduate, graduate, and law school tenure.

In my experience with ISO's, a disqualifying disposition happens when the stock is sold before meeting the holding period or employment requirements. The employer then deducts the excess of the fmv on the date of exercise over the option price and reports it on the W-2 as compensation. If there are any proceeds from the sale over the fair market value on the date of exercise then that portion is treated as a capital gain or loss.

A qualifying disposition occurs when the stock is held for the required holding period. I have never seen a qualifying disposition reported on the W-2. They have a capital gain or loss upon sale of the stock in the amount of the excess of the sales price over the option exercise price. On those shares, the employee would have had an AMT preference items for the difference between the fair market value on the date of exercise and the the exercise price. This preference creates a different basis for AMT than for regular tax. In addition the AMT paid related to this preference may be used in any year to bring the AMT liability down to the same as regular tax liability.

Finally, it is important that execs with ISO's plan carefully because if they time things correctly with a sale in the year they again exercise new ISO's the AMT credit may be enough to eliminate the AMT due to the exercise.

They need to track the basis for regular tax and AMT so that correct basis is used.