When I left my previous employer, I retained on option to buy 1000 shares of their stock at $4. Finally after 9 years, the options were about to expire, so I exercised all the options. I sent the company $4000 and they transferred the 1000 shares to my broker. The stock was $10 the day I exercised the options. I am still holding the shares.
Is my income equal to the difference between what I paid and what the stock was worth on the day of the grant? In this example $6000.
I did not receive a W-2 or a 1099 from the company. Should I have received something from them?
If I don't get a form from the company that documents the income, where/how do I report it?
Are these qualified or incentive stock options. If incentive, then the difference D (between what you paid and what the stock was worth on the day of the grant, which is $6000 in your case) is added to your AMT income on line 13 ("Exercise of incentive stock options (excess of AMT income over regular t ax income)"). If these are non qualified stock options, then the difference D gets added to your W2 income, and you also have to pay social security and medicare tax. Normally your employer is responsible for withholding these additional 2 taxes, but you can file form 8919 ("Uncollected Social Security and Medicare Tax on Wages") to pay the tax.
Incentive case: If you later sell the shares at $20 a share, then form
1040 will report the profit as $20000-$4000=$16000 minus commissions, but for AMT the cost basis is $10, so I'm guessing that line 16 ("Disposition of property (difference between AMT and regular tax gain or loss)") would be -$6000, that is negative 6000. However, there is also an AMT credit form 8801 where you basically calculate your AMT tax without the incentive options, and the difference between the regular AMT tax and the modified AMT tax is your credit -- so you would have a credit of aout 28% of D = 0.28 * 6000 = $1680. You can take the credit in future years, but there are conditions under when you can and can't take the AMT credit which I don't understand as yet, and also how much the credit is (it cannot make your tax negative, but the difference gets carried over). But if you take the AMT credit, then should line 16 be zero when you dispose of the shares? And if your income is too high or too low that AMT does not apply, then there is no credit. And what if your income is medium enough so that you pay AMT when you exercise the shares, but when you dispose of your shares and your income is too high or too low that AMT does not apply, then what happens then -- it seems you would be paying double tax on the amount D, once in AMT when you exercised, and later in capital gains.
Seems like it is an incentive option, so you don't get a W2.
Thanks for your detailed answer. I'd like to further understand if these are ISO or NQSO.
My understanding is that since I am no longer an employee, the options automatically become NQSO regardless of their type when they were granted. Does that sound correct?
There some rules about how to tell if an option is incentive, but they don't make sense to me. Basically, the stock option plan must have been approved by the shareholders. That would mean non qualified stock options were not approved by shareholders? Pretty strange.
But coming back to earth, contact the brokerage or company to ask them if they are ISO's. Also, look at documents of your stock options to see if they use the word "incentive".
No.
Since you didn't receive a W2, it seems the company has nothing to do with it any more in the sense of paying their portion of social security ane medicare.
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