Wednesday, April 22, 2015

After divorce, what happens to your employer stock options?

According to the general rule for transfers of assets between spouses or ex-spouses under a divorce property settlement, the transfers are treated as gifts between spouses for federal tax purposes. As such, the transfers are federal-income-tax-free and gift-tax-free. This is good.

When this favorable general rule applies, the transferee spouse (the person who receives the asset in the divorce settlement) takes over the transferor spouse’s tax basis and holding period for the transferred asset. So when the transferee spouse subsequently sells the asset, he or she recognizes taxable gain or loss as if he or she had owned the asset from the outset. On the other side of the coin, there’s no tax impact on the transferor spouse (the person who gives up the asset in the property settlement) when the general rule applies.

Warning: Divorce-related transfers to a nonresident alien spouse don’t qualify for such benign treatment: they are considered to be taxable transactions that can trigger taxable gains or losses.
Federal income tax consequences for divorce-related transfers of vested employer stock options
What happens with a divorce-related transfer of vested employer stock options from the employee spouse to the non-employee spouse pursuant to a divorce property settlement? Good question. Read on for the answers.

For instance, assume Spouse A (the employee spouse) owns vested nonqualified employer stock options (NQSOs) that she received as compensation from her employer. Because the NQSOs are not publicly traded, Spouse A was not taxed upon receiving the options. Assume that under applicable state law, the NQSOs are considered marital property. Therefore, Spouse A is require to transfer some of her NQSOs to Spouse B (the non-employee spouse) pursuant to the couple’s divorce property settlement. Sometime later, Spouse B exercises the NQSOs. At that time, the fair market value (FMV) of the stock is above the option exercise price.

The IRS says the transfer of vested NQSOs from Spouse A to Spouse B falls under the general tax-free transfer rule (assuming the non-employee spouse is not a nonresident alien). Therefore, the transfer has no immediate federal income tax consequences for either spouse. However, upon exercising the NQSOs, Spouse B must recognize taxable income equal to the difference between the fair market value (FMV) of the option shares and the exercise price (the “spread”). This profit is ordinary income (as opposed to capital gain) because Spouse B is treated as if he received the NQSOs as compensation from his employer. (Source: IRS Revenue Ruling 2002-22.)

If the vested employer options in question are incentive stock options (ISOs), the federal income tax outcome is the same, because an ISO cannot be transferred to or exercised by a person other than the employee to whom the option was granted (except by reason of the employee’s death). Therefore, when an ISO is transferred to a non-employee spouse, it instantly ceases to be an ISO and instantly becomes an NQSO, and the federal income tax outcome is exactly the same as explained above.
These federal income tax rules are favorable to the employee spouse (the person who gives up the options in divorce), because he or she faces no further tax consequences after the divorce-related transfer. The non-employee spouse (the person who receives the options in the divorce-related transfer) bears all the federal income tax consequences.

Federal employment tax implications

The IRS has also issued rules on the federal employment tax consequences of divorce-related transfers of vested employer stock options. By federal employment taxes, I mean Social Security tax, Medicare tax, federal unemployment tax (FUTA), and federal income tax (FIT) withholding. Here’s the drill.

When the general tax-free transfer rule applies (which will usually be the case), the transfer itself does not trigger any federal employment taxes. However, when the options are subsequently exercised by the non-employee spouse, federal employment taxes are triggered to the same extent as if the employee spouse had retained the options and exercised them.

So the non-employee spouse may be hit with withholding for Social Security tax (at a 6.2% rate), will definitely be socked for Medicare tax (at a 1.45% rate), and may be hit with the new 0.9% additional Medicare tax for high earners too. To make this completely clear, the amount of withholding for these taxes is determined by the employee spouse’s year-to-date earnings from the employer. However, the taxes are actually withheld from the non-employee spouse (the person who exercises the option). This is fair and just, because the non-employee spouse is the one who reaps the economic benefit from exercising the option.

Finally, federal income tax must also be withheld from the non-employee spouse. The non-employee spouse can then claim a credit for the withholding on his or her federal income tax return. Source: IRS Revenue Ruling 2004-60.

You own vested NQSOs received as compensation from your employer. The options give you the right to buy 10,000 shares of employer stock at an exercise price of $15 per share. The options expire on 12/31/15. In 2015, you and your spouse are divorced. As part of the divorce property settlement, your ex receives half of your NQSOs.

The transfer of the vested NQSOs from you (the employee spouse) to your ex (the non-employee spouse) has no immediate tax consequences for either party.

Assume that later in 2015, your ex exercises the NQSOs by acquiring 5,000 shares for $15 each at a time when the stock is worth $25 per share. Your ex must recognize 2015 ordinary income of $50,000 (5,000 shares x $10 “spread” per share). Federal income and employment taxes will be withheld from your ex. The exercise has no tax impact on you.

The bottom line

You now understand the federal income and employment tax consequences for most divorce-related transfers of vested employer stock options. The rules actually make sense and are fair to the divorcing individuals.

I don’t say this very often, but thank you, IRS!

Tuesday, April 21, 2015

Women To Women Advice On Your Divorce

Wouldn’t life be wonderful if we could give ourselves advice on experiences before we experienced them?  Divorce is a hindsight 20/20 situation.  Divorce is one of those situations where we need advice before we go through it but often don’t know where to turn.  Other women who have gone though divorce come in to play to help us.  Below are the top ten pieces of advice women give each other when moving through the divorce process.
It can take some time to recover
Just because the divorce process has started or finalized does not mean that there is an automatic switch that will allow you to recover.  Recovering from a divorce is difficult.  You won’t necessarily be able to bounce back and go about your life as it was.  Take time to recover.  You need time to process and heal.  You may feel like you can barely function and that too is okay.  Be ready however because there will come a time when you will be ready to move on and to let yourself heal.
When looking for council don’t settle on an attorney; it is important that you find an attorney that specializes in family law and divorce.  A lawyer that specializes in something other than divorce and family law will not get you the results you want out of your divorce.  A divorce attorney understands all the ins and outs of local law and state nuances.
Analyze your finances
Get as much information as you can about the family finances.  You not only have to have a handle on your own finances but also a grip on all of the accounts within the household.  You should know what payments are coming out automatically, where funds are invested, what bills need to be paid and more.  If possible gather online usernames and passwords so that you are able to look up information as needed.
Consider the future of your living expenses
If you are going to be living on your own it is important that consider the money that you have coming in to decide what you can afford to have outgoing every month.  If you don’t know exactly what you will need you won’t know what to ask for and then may end up sacrificing your own financial needs.
Stop thinking of divorce as failure
Don’t beat yourself up.  Divorce is not about failing or being rejected all it means is that your relationship did not work out.  The sooner you understand that you are not at fault the sooner you will be able to get on with moving on with your life.
Longton DM, a subsidiary of Longton Law Offices is a divorce attorney specializing in Women/Mom’s in divorce throughout Trenton and the surrounding Michigan areas. Find us at

Financial Matters and Your Divorce

As a man it is important to protect yourself in divorce, especially in financial matters.  Below are a variety of items to have in order for discussions with your divorce attorney regarding your financial status.
Gather your financial documents.  You should take time to pull of your financial documentation together and move it to a safe location.  Make copies for your attorney to review as well.  Understand that your wife will be trying to gather the same documentation and will be going through every document she can to help gather information on your finances as well.
Bank Accounts
Collect the information together regarding bank accounts that are not only in your name but in your spouse’s name and children as well.  Don’t do anything rash with the money in your accounts before you speak with your divorce attorney.  If you have several joint accounts it is important that you discuss dividing the accounts between the two of you before your divorce is finalized.  No matter what you do don’t deplete the finances that support your family.  This will not look favorable when a judge is reviewing your case.
Credit Cards
Any joint credit cards should be closed to ensure that your spouse doesn’t go on a spending spree that leaves you responsible for half.  Close joint credit cards and notify the credit card companies that you are no longer responsible for credit cards held in your spouse’s name.
If you need credit cards it is crucial that you open new accounts with only your name on them.  These new accounts should not be linked to your old accounts or spouse in any way.
If you are the spouse with insurance it is not appropriate to drop your spouse or your children until you have met with your divorce attorney and a judgment has been put into place by a judge.  You are the responsible party for all medical bills until your divorce is finalized and even after sometimes you may decide to keep your children and ex covered.  If you are still going to be held liable for medical expenses in your child support and alimony agreements you may decide to continue coverage.
Take inventory of the valuables within your household.  If something within the house is of great sentimental value and you are moving out before the divorce is finalized speak with your divorce attorney about removing it.  You will want to ensure that anything of value or sentimental value is documented in the eyes of the court before selling, splitting or removing them from the house.
Longton DM, a subsidiary of Longton Law Offices is a divorce attorney specializing in Men/Dad’s in divorce.  For experienced representation throughout the divorce process in Trenton, Michigan and the surrounding area you can find more information at