The 2014 tax-return season has more potential than ever for confusion, uncertainty, and expensive mistakes. Anybody who sold stock during 2013 must be sure to understand all the related IRS forms. On tax returns involving restricted stock and restricted stock units, many potential errors involve the reporting of sold shares on IRS Form 8949 and Schedule D of IRS Form 1040. Below are some basic mistakes to avoid.
1. After selling any or all of the shares at vesting, you still need to report this sale on IRS Form 8949 and Schedule D even though you are also including it as part of your compensation income on Line 7 of IRS Form 1040. You may even have some small gains or losses, depending on how your company calculates the stock value at vesting and any commissions and fees for the stock sale. (For an annotated example of how to report the restricted stock sale on these forms, see an FAQ on myStockOptions.com.)
If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, the IRS would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice about the taxes.
2. Even though you never purchased the stock, your tax basis for reporting the stock sale in column (e) on Form 8949 is the amount of compensation income at vesting that appeared on your W-2 (you already reported it on your tax return). If you made a Section 83(b) election (not available for RSUs), the basis amount is the value at grant on your W-2. Do not assume that, because you did not pay any money to purchase the stock or exercise anything, your tax basis is zero. The cost basis on Box 3 of your 1099-B is blank only because brokers are not required to report the cost basis for noncovered securities, such as restricted stock and RSUs. Otherwise, you will pay double tax on the value of the shares at vesting. See a related FAQ with annotated diagrams of Form 8949 and Schedule D that show how you report stock sales after you have held the stock at vesting.
3. Another way to mistakenly double-report income can occur if you do not realize that your W-2 income in Box 1 already includes stock compensation income. You may wrongly think it was left out, so you erroneously report the income on your Form 1040 in the line for "Other income" (Line 21 on the 2013 form and not Line 7, mentioned above). If you do this, you will be taxing the stock grant income twice as ordinary income. You use Line 21 only when your company mistakenly omits the income at vesting from your W-2 or 1099-MISC.
4. Dividends you receive on restricted stock can raise a few tax-reporting issues during vesting and after the shares vest, as detailed in a related FAQ. In short, the dividends paid will be compensation during vesting (unless you made a Section 83(b) election, which makes the dividends eligible for the lower tax rate on qualified dividends). Be careful not to duplicate dividend income that is part of your W-2 in the total received dividends on your Form 1040.
To read four other crucial tips on tax-return reporting involving restricted stock and RSUs, see the full FAQ about this topic on myStockOptions.com. Also, see other FAQs for the biggest tax-return blunders to avoid with stock options, employee stock purchase plans, or stock appreciation rights.