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Nonqualified Stock
Options in a Divorce |
If property is transferred to an employee in connection with performing services, the employee is generally required to pay tax on the excess over fair market value in the year of the transfer. For nonqualified stock options that do not have a readily ascertainable fair market value, this rule applies upon the exercise of the options or any
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Two Basic Stock Option Types
Nonqualified: You generally don't owe tax when these options are granted. When exercising, tax is paid on the difference between the exercise price and the stock's market value. They may be transferrable.
Incentive: These options may qualify for special tax treatment on gains. Tax is deferred until you sell the stock. However, the income is considered a "preference item" for calculating the alternative minimum tax. | cash or other property received in an arm's length disposition of the options.
However, no gain or loss is realized when property is transferred between divorcing spouses. What happens if nonqualified stock options are included in a divorce agreement? In an IRS ruling, the tax agency addressed the question.
A business executive was granted nonqualified stock options by his company. He also participated in the company's nonqualified deferred compensation plan. Pursuant to his divorce, he transferred to his spouse:
One-third of the nonqualified stock options.
The right to receive deferred compensation payments based on 75 percent of his account balance.
The right to a single sum payment of $25,000 upon termination of employment.
The IRS concluded that the non-recognition rule for divorcing spouses controls in this situation. Therefore, the executive isn't taxed on the transfer, even though it involved an arm's length negotiation. Instead, his spouse will be taxed upon the exercise of the options and the nonqualified deferred compensation when it is paid or made available to her (IRS Revenue Ruling 2002-22).
(For more information about unexpected tax traps that can occur when a marriage ends, read our previous article "Don't Get Taken to the Divorce Tax Cleaners" )
For more information about this topic or Stambaugh Ness's extensive Tax Services, you may visit the Stambaugh Ness website or contact Tax Advisor Colette Brownson or Tax Specialist Melissa Myers at 717-757-6999/800-745-8233. You may also contact either of them by using the contact form below. |
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any US tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. |
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