When Do It Yourself is Not a Good Idea (Incentive Stock Options)

I am like a lot of people in that I sometimes overreach my abilities when it comes to do it yourself.  Like that time I tried to rehab the bathroom walls and actually ended up worse off than before.  It's like Dirty Harry said, "a man's just got to know his limitations."  This year IRS revised the instructions for a reporting form used by stockbrokers in connection with stock trades, etc., form 1099-B.  The change makes for a confusing situation with regard to exercise of incentive stock options, which is a form of bonus awarded to usually fairly high paid executives.  Now many of these individuals probably already have accountants, but some who are particularly bold and self assured will no doubt try to do their own taxes with Turbo Tax, Tax Cut, or whatever the new thing is.  I expect to meet some of these guys this summer when they figure out they have overpaid on their taxes. 

Doing your taxes with Turbo Tax may be just fine for a great many people and so I don't discourage that for those where it fits, and I will tell people that to my own disadvantage.  However, if you have doubts, don't do it yourself.  With the exercise of incentive stock options, you have a couple of choices.  You can pay the exercise price yourself and buy the stock at a bargain price.  You hold the stock for over a year and you get capital gains treatment, which is favorable to you.  However, if you do as a great many people do and have the stock sold immediately upon exercise so that you don't have to come up with any cash, then the gain is treated as compensation and is included with your salary on your W-2.  The gain is taxed as ordinary income rather than capital gains, and the company gets a deduction no less.  Now here's where it gets interesting. 

The IRS instructed the brokers that they have to report the exercise price as the cost basis in the stock rather than the amount included in your W-2, which is the correct number.  Trust me, this is sneaky stuff.  If you use Turbo Tax and enter the numbers right off the official IRS approved forms, you will wind up reporting the same gain twice on your taxes.  I said it was sneaky, didn't I?

There is a proper way to report this gain, and IRS has provided the instructions to do this, but you have to read very carefully to find the instructions, and then they are written in IRSspeak which is a language in and of itself.  Now I guess here is where I could provide a line or two on how it should be done, that would save the self-assured high paid executive a lot of grief, and it would be the nice thing to do, but noooooooooooo.  

Sometimes it's just better to hire the pro.