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Say it with cash

Stock_cert_2 I'm not a fan of stock options.

They were "the" benefit back in the dot-com heyday and a few places still offer them, although an accounting practices change has made them a bit more of a bother for the granting companies.

Even if they're no longer offered like breath mints at your local diner's cash register, some folks still have options they can eventually exercise.

But to my thinking, they're more trouble than they're worth.

Yeah, I know you get a price break on the stock, which means you'll net more profit when you sell and all's good. Unless your company runs into financial difficulties and suddenly your options are underwater.

Even when they work out as planned, the whole process has always seemed to me to be a mess. The investment company Raymond James tries to "simplify the process" of exercising stock options here; if this is simple … .

Personally, when I was working for a company, I would have much rather had a nice annual raise. Then I could decide whether I wanted to buy my employer's (or any other company's) stock with my extra cash.

I know, I know, it would have been at the market price, but still it would be totally my choice as to how much I wanted to invest in the company beyond my 9-to-5 attention it already gets.

Plus, it never really seemed to me like such a benefit if I had to use my own money to buy a specific, and limited amount of, stock and then had to hassle with selling the shares and taking care of the tax implications in order to finally get some actual cash money in hand.

"But," options advocates argue, "you get to be an owner of the company you work for." Sorry. That just never rang true to me. Yeah, right, I'm an owner with my piddling 0.05 percent stake in the firm. That level of ownership doesn't buy a whole lot of listening to at the annual meetings.

Joining the ownership pitch is the "company as family" spiel. News flash: Work and families are totally different. Everybody knows that. First and foremost, your family can't fire you. Trust me, in many instances I've desperately wished I could have sent some of my relatives packing. Employers, however, will hand you a box in which to place your cubicle effects in a heartbeat. That's business, folks, not family.

Perhaps my disdain for options is because I was a victim of personal economies of scale. If I got a gazillion shares of a hot company's stock via options, it would be different. I'd feel more like an owner and maybe have a slightly softer spot in my heart for the ol' firm.

But one thing wouldn't change: the taxes. Just ask Steven Jobs.

It was revealed this week that the Apple Computer CEO and chairman gave up nearly half his stake in that company in order to pay the taxes on 10 million restricted Apple shares that vested. According to the Wall Street Journal:

"In a filing with U.S. securities regulators last week, Apple said it has withheld more than 4.5 million company shares, worth $296 million, from Mr. Jobs, leaving the Apple executive with 5.4 million company shares, worth $323 million. The shares were part of 10 million shares of restricted stock Apple awarded to Mr. Jobs in March 2003, a grant that vested over three years."

My favorite line in this whole deal comes from an unnamed person at Apple: “A stock grant of this size attracts a substantial levy."

And that's why my personal mantra when it comes to compensation still is, "Say it with cash."

TODAY'S TAX TIP: Sure, cash compensation still means a tax bill, but at least it's taken care of via payroll withholding, meaning I won't have to jump through all the extra accounting and reporting hoops of untaxed-at-the-time earnings.

Heck, it's painful enough when you make money on relatively simple investment transactions.

This story looks at the tax-time requirements of Schedule B or Schedule 1, depending on whether you file, respectively, a long 1040 or the shorter 1040A). Earn over $1,500 in either dividend or interest income, and you'll have to fill out this extra paperwork.

It gets more document, and calculation, intensive when you sell assets.

In order to report your taxable investment dealings to the IRS you have to determine your asset's correct tax basis. That can pose problems for folks who've reinvested dividends and then paid taxes on those earnings all the years before selling. You've got to keep track of those added shares and their prices so you can show you don't owe on them when you sell the whole batch. Details on this procedure here.

Then there's the actual filing process and Schedule D, a two-page form where the IRS wants details of your investments and what you made, or lost, when you sold them.

Earlier this filing season, many investors and their tax and accounting staff ran headlong into a new problem with Schedule D. The schedule's instructions this year told taxpayers they "must enter the details of each transaction on a separate line" and not to enter "see attached" or summary totals in lieu of reporting such details on Schedule D or D-1.

The tax information and publishing company CCH reported that financial and tax professionals were concerned that compliance with the line-by-line listing rule, especially in the case of securities sales, would pose major time and cost burdens for paper filers, not to mention how to adapt the rule to e-filing. Investors and professional groups requested that the IRS allow summary attachments of year-end brokerage statements, which they claim is consistent with past practice.

The IRS heard the clamor and responded with an announcement (in full here) that provides a series of Q&As concerning the line-by-line filing requirement. In the case of e-filers, the IRS now says they may attach brokers’ statements or other acceptable documents with all the necessary information for Schedule D or D-1 to Form 8453, U.S. Individual Income Tax Declaration for an IRS e-file Return.

And e-filing was supposed to make all our lives so much easier!

There is, at least, a silver lining for this huge cloud of paperwork: Much investment income is taxed at a lower rate. Most long-term capital gains and certain dividend payments face taxes at only 15 percent vs. a potential top ordinary income rate of 35 percent.

So I guess I should quit complaining about options and investment income and associated tax filing hassles and remember the words of one tax adviser, who no doubt smiled when he read about Jobs' big tax bill.

Taxes, he noted, are evidence that you're making good investment decisions and your portfolio is earning money. Viewed that way, he told me, "I dream of the day when I pay a million dollar capital gains tax bill."

Carnival coda: This entry is part of the April 3 Carnival of Investing hosted by Free Money Finance. Check it out. Read, learn, invest!


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