Message Font: Serif | Sans-Serif
No. of Recommendations: 0
I have a question about how to enter my NQSO exercise into Turbo Tax. An amount was reported on my W2 as income. So I know that I take the cost of the options plus the W2 income reported from the sale for my basis (same day sale). However, there is a small box "taxes were witheld on this sale (box 4)". Yes, they were (at a rate of 25% fed, plus SS 6.2%, plus medicare 1.45% plus state tax 5.75%). However, I'm uncertain if that already has been handled by adding my W2 income from the sale to the basis. If I check that box my amount owed drops dramatically (actually it becomes a refund). I like that, but maybe it is counting the taxes witheld twice??

I exercised some NQSOs in tax year 2000. Even though I knew exactly how they should be treated for tax purposes, it took me six (count 'em, 6!) tries to figure out how to enter them in TurboTax to produce the correct result. Unless TurboTax has improved this area significantly since then, TT is just plain confusing with options.

What should happen: You should have W2 income for the difference between strike price and market price as of the day you exercised. You have that, complete with appropriate withholding of payroll taxes. In addition, you have a sale of shares that will produce a very small (possibly zero) gain or loss from selling the shares immediately. If payroll valued the shares at the amount they sold for, you will have a loss for the amount of any commission they charged you. If payroll valued the shares at the average of high and low traded price for the day, you will have a gain or loss for the difference between the payroll valuation and what they actually sold for, less any commission you were charged.

I think what I ended up doing was not telling TT I exercised options at all. I let the W2 income flow, and entered the sale of shares directly onto Schedule D. Because I have not had NQSOs since then and am not using TT this year, I don't know whether TT has a better provision for NQSOs than it had in 2000. I do know that you should be able to achieve the correct result somehow, and the trick is knowing the correct result when you see it. Some of the ways the TT instructions seemed to tell me to do things double-counted the ordinary income from the option exercise (once from Box 1 of the W-2, another time from an independent calculation done by TT).

You should independently verify that whatever you put into TT comes up with the correct total employee compensation, neither omitting nor double counting the ordinary income from exercise of the options. You should also independently verify that the sale on Schedule D produces the correct gain or loss, which should be small for a same day sale. This is one area where you can't afford to trust TT to do your analysis without intelligent human supervision.

Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.