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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121477  
Subject: Re: NQSO and tax software Date: 2/12/2006 7:41 AM
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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.

Patzer
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