Once again, the season of tax returns returns (if you'll pardon the expression). At myStockOptions.com, this is one of our busiest times of the year, not only for website traffic but also for editorial updates in our Tax Center. We work hard to stay on top of new developments in the tax-return reporting for stock compensation and company shares, along with tricky points to watch out for in the related IRS forms. This blog commentary provides an overview of topics to keep in mind as you prepare to file your 2016 federal tax return in 2017.
Be Aware Of Tax Changes In The Past Few Years
In general, 2016 brought no major tax changes to consider. Although tax reform is likely in 2017, it will not affect tax-return reporting of 2016 income. However, developments over the past few years, such as changes in tax rates or amounts that are indexed yearly for inflation, continue to affect tax-return reporting. Here is a quick take on some issues to be aware of when filing your 2016 federal tax return in 2017:
- If you received a grant of restricted stock this year and made a Section 83(b) election to be taxed on the value at grant (not permitted for RSUs), under rules the IRS finalized in July 2016 you no longer need to attach the paper election to your tax return. For more details, see the related FAQ at myStockOptions.com.
- Under tax-rate hikes that came into effect in 2013, high-income taxpayers have increased tax rates on ordinary income, capital gains, and dividends, along with the return of phaseouts on personal exemptions and itemized deductions (see our FAQ on the American Taxpayer Relief Act). Any changes in tax rates that may occur in 2017 under the new president and Congress will not affect the 2016 tax return that you file in 2017.
- The alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate are now indexed for inflation and have risen (see our related FAQ). These are important for people who have incentive stock options.
- Following the Supreme Court's decision in Obergefell v. Hodges (June 2015), which legalized same-sex marriage throughout the United States, all same-sex spouses must now use married filing status not just for their federal tax returns but also for their state tax returns (whether married filing jointly or married filing separately). Before Obergefell v. Hodges, same-sex spouses who were married in a state where they did not live had to file as singles if their state of tax residence did not recognize their marriage. As filing under married joint status will often result in more tax than filing as singles will, they probably have little incentive to amend past tax returns from single to joint status. For more about the equity compensation and tax impact of the Supreme Court's decisions on same-sex marriage, see our related FAQ.
Important Recent Changes That Affect Stock Compensation Reporting
The 2016 version of IRS Form 1099-B, which brokers issue for stock sales made during the tax year, closely resembles the version for the 2015 tax year. However, the 2014 version introduced some major changes that you should continue to keep in mind when reviewing your 1099-B and the substitute statement that your broker provides for stock sales in 2016 (see the discussion below and our related FAQ).
- Among the recent changes in Form 1099-B: The all-important cost-basis information is now in Box 1e instead of the previous Box 3. Also, for grants made in 2014 and later years, brokers are prohibited from including equity compensation income (which appears on Form W-2) in the cost basis reported on Form 1099-B.
- IRS Form 8949 and Schedule D, which you complete by using information on Form 1099-B if you sold company stock or other securities, were revised in recent years. The versions of the forms for the 2016 tax year, to be filed in 2017, are similar to last year's versions. The columns on Form 8949 now match up with the boxes on Form 1099-B.
- If the basis reported to the IRS is correct on Form 1099-B and does not need any adjustment, the IRS now lets you skip Form 8949 and report the sale only on Schedule D. Usually, however, with stock compensation either the reported basis is too low or the box on the form is blank (see our related FAQ). Even if the basis has been correctly reported, it may be simpler for your recordkeeping to list all of your securities sales together on Form 8949.
Alert: See whether your broker has any supplemental information and tax guides that can help you understand the cost-basis reporting and adjustments needed on Form 8949.
Resources For Tax Season
For guidance on the tax-return reporting for sales of shares acquired through stock compensation, including annotated diagrams of Form 8949 and Schedule D, see the section Reporting Company Stock Sales in our Tax Center. Elsewhere in the Tax Center, another section gathers our popular annotated diagrams of Form W-2. These can help you make sense of Form W-2 (which companies issue in January) when the reporting on the form includes income you received from stock options, restricted stock/RSUs, or employee stock purchase plans.
If you exercised ISOs last year, your company will send you Form 3921. If you purchased shares through an ESPP during the year, your company will send you Form 3922. Employers send these forms in January. We have articles and FAQs with annotated diagrams of Form 3921 and Form 3922 that can help you understand these documents.
If you participate in a nonqualified deferred compensation (NQDC) plan, see myNQDC.com for educational guidance on tax-return reporting.