Does income from exercised non statutory stock options reported on W2 count as earned income so I can contribute to my IRA? I'm retired & not contributing to a 401K plan.

[chuckr1]

It depends.  If you do a same day/cashless exercise, it goes right on your W2.

Take a look at this article...

https://turbotax.intuit.com/tax-tips/investments-and-taxes/incen[product key removed]ns/L4azWgfwy

"If you can wait at least a year and a day after you purchase the stocks, and at least two years after you were granted the option to sell the stocks (as described in item 5 above), any profit on the sale is treated as a long-term capital gain, so it is taxed at a lower rate than your regular income. (Your profit is the difference between the bargain price you pay for the stock, and the market price that you sell it for.)"

[chuckr1]

Relative to the earlier W2 Box 11 discussion, I found the following excerpt from an article by Lou Vlahos very interesting.  I think this is the reason why my Box 11 is zero and therefore NSO proceeds can count as earned income towards an IRA (combined with the fact I didn't hold the shares).  I assume this would not be the case if the employee (retiree in my case) held the shares for 1 year and 1 day after  exercising resulting in it all being treated as long term capitol gain.

"The Section 409 Regulations provide that an NSO to purchase a fixed number of shares of employer stock is not treated as a nonqualified deferred compensation plan subject to section 409A (and therefore is exempt from section 409A) if the exercise price is not less than the fair market value (“FMV”) of the underlying stock on the grant date of the option and certain other requirements are met.

Conversely, if the exercise price is less than such FMV, the option is treated as a nonqualified deferred compensation plan subject to section 409A that must meet the time and form of payment requirements under the section 409A regulations."

[Sartori162]

Has a tax expert weighed in on this question yet -- For a retiree with no other 'earned' income, does the gain from an NQSO same-day sale exercise meet IRS requirements for ‘earned income’ to enable a deductible contribution to a traditional IRA?

• During the entire tax year, I was a retiree receiving a pension, but otherwise “not covered by an employer retirement plan".

• During the tax year, I exercised an NQSO via a same-day sale. The gain was subject to withholding for federal income tax, Social Security tax, and Medicare tax. I received a W-2 from my previous employer that showed the gain in Box 1. Box 11 was blank. Box 12 showed the same amount as box 1 with the code V.

[macuser_22]

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@Sartori162 wrote:

Has a tax expert weighed in on this question yet -- For a retiree with no other 'earned' income, does the gain from an NQSO same-day sale exercise meet IRS requirements for ‘earned income’ to enable a deductible contribution to a traditional IRA?

• During the entire tax year, I was a retiree receiving a pension, but otherwise “not covered by an employer retirement plan".

• During the tax year, I exercised an NQSO via a same-day sale. The gain was subject to withholding for federal income tax, Social Security tax, and Medicare tax. I received a W-2 from my previous employer that showed the gain in Box 1. Box 11 was blank. Box 12 showed the same amount as box 1 with the code V.

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No expert necessary.  The IRS clearly says in pub 590A that compensation for IRA contributions is W-2 box 1 minus box 11.   (Box 12 is irrelevant).

https://www.irs.gov/publications/p590a#en_US_2020_publink1000230357

[1924peter]

Hi,

I have the same amount in W2 line 1 and 12 (v). Line 11 is zero.  Turbo tax is saying that I have zero earned income for Roth IRA contribution.  Can you help?  Thanks

Peter