AboutGerard L. Samoleski, CPA* Expertise Individual Income Tax, Business Income Tax, Partnership Income Tax, Estate Tax, Gift Tax, Tax Planning, Business Valuation, Divorce Tax. I can't answer legal questions as I am not an attorney.
Experience 10 years of Federal and State tax preparation for high-net worth individuals, including a major international accounting firm.
Organizations AICPA, FICPA, NACVA
Education/Credentials Bachelor of Business Administration (Accounting Major)- University of Miami (FL);Master of Science of Taxation, University of Miami (FL)
Awards and Honors Certified Public Accountant*, Certified Valuation Analyst, Accredited in Business Valuations. *Regulated by State of Florida
Question 1. Is income from equity option recognized immediately or
at expiration of the option?
2. At time of death my sister had a stock priced at $225;
she also had an option calling the stock at $210.
What is the valuation for that stock?
Thank you for your help
Answer Tricia:
I'm trying to figure out if your questions pertain to an Estate tax return or a final 1040. I'll try my best to answer for both cases.
1. In terms of a final 1040: If the option was a nonqualified stock option, the "earned income" portion is to be recognized in the year the option was granted.
If it is a qualified stock option, the trigger is when the stock is sold. Qualified options exercised and held less than a year will be taxed as salaries and wages. Options exercised and held for a year or longer will be treated as long term capital gain.
I know this sounds complicated, but it's fairly straight forward when you look at the final W-2 and 1099 as the company and brokerage firm will issues those forms which will tip you off as to how you are supposed to report it.
For her Estate tax return (if she has to file one), you would report the value as of the date of death as an asset.
2. If your sister had an option at her death, the options value would be reported on her estate tax return as of the date of death. That value would be the new basis.
Let's say you buy an option for $10 to buy 100 shares of GE at $40. If you pass away and GE was selling for $41 on the date of death, than your option is valued at $10 plus $100 (that is the $1 above strike price x 100 shares).
In your example, it seems to me that the value of the option is $15 per share she was eligible to buy plus the cost of the option.
I sincerely hope this helps and am sorry to read your sister passed away. Please feel free to ask any follow up questions.
