Options Trading Tutorial

help!!!..INCOME TAX..employee stock options program..how to?

my mother had an employee stock option plan at her old job...she started buying stocks in 2005 and held them until 2009 when she sold $3000 worth of stock...she did her income tax return and forgot to report them so she did an amendement..she only earned around $17000 that year when the amendment was done..the tax preparer added the $3000 for the stocks my mom had sold and told my mom that on those $3000 she owed $2900 in taxes!! she is 54 yrs old, held the stocks for almost 5 yrs..all the tax preparer asked was how long she held them..ive been reading up on them and i read and also from calling IRS that she should have been asked if they were qualified or non qualified stocks...does anyone know anything about this?? it just seems like being taxed $2900 for $3000 is too much...why would anyone ever buy stocks then! should i just take her w2 form and stock form she got for income tax and have someone else do them.?????

Public Comments

1. Employee stock options come in different kinds and methods of dealing with the tax. Any answer given based on the information you have would be unwise. That said it would appear that your mothers case may not have been handled correctly. But it may be too late now to get a refund.
2. Start by getting IRS publication 525 and reading up on stock options. There are ISOs, NSOs, ESPP, ESOP and restricted stock...and even a few cases were the stock was a bonus and the employee paid nothing. Figure out what she had. You also need to figure out when she bought the last of the stock relative to when she sold it. A true ESPP (money from each paycheck is used to buy stock) tends to have a discount element. For example, the plan can say whenever they use the money to buy stock, they give her a 15% discount. When she sells the stock, the 15% discount is added to wages and her cost basis for the schedule D is the FMV on the date she bought the stock. The gain/loss on the schedule D is determined by subtracting out the cost basis. If she truly owned the stock for 5 years, then the gain on the schedule D is at LTGC rates. Even at a gain of $3000, the LTCG on the schedule D would have been zero since the gain AND the rest of her income was less than the 15% tax bracket. Find ALL the paperwork and take them to someone else. Note, the taxes were paid on a 2009 return--you can amend for the LATER of 3 years from when the return is filed *or* 2 years from when the tax was paid whichever is later.