If you haven't heard the good news, permit yourself a brief celebration. The IRS has simplified the iconic Form 1040 tax return in ways it believes will benefit most taxpayers. The 2018 Form 1040 has been condensed from the prior 73 lines to just 23 lines.
However, for people reporting capital gains from stock sales or alternative minimum tax (AMT) from ISO exercises, that's where the simplification ends.
To feed information to the shortened Form 1040, the IRS created six new “schedules” (supplementary forms). Many of the lines removed from the surface Form 1040 document now occur on those schedules, which funnel information to it. Among the lines the IRS form designers moved to the schedules are the lines for reporting capital gains and the alternative minimum tax (AMT).
The IRS calls its revision a “building block” approach. In the belief that most taxpayers were not using most of the sometimes bewildering 73 lines on the previous version of Form 1040, the IRS shortened the document to make filing less confusing to the average taxpayer. The method is roughly similar to how you would declutter your desk, putting items you seldom use into drawers (the new schedules) while keeping on the surface your most frequently desired objects. So if you’re not what the IRS considers an average taxpayer, your challenge now is to find which drawer holds the item you need, such as capital gains reporting for sales of stocks, ETFs, mutual funds, or other securities.
Be Aware Of What’s Changed
Executives and key employees at many companies will note some potentially disruptive changes in what goes where for important parts of their compensation and income. Below are the major changes to know about that affect where to report income from compensation—such as salary, cash bonuses, stock option exercises, restricted stock/RSU vesting, and ESPP purchases—or gains from sales of company stock.
Stock compensation as well as salary and cash bonus income is now reported on Line 1 of Form 1040 (previously Line 7). If you see any article on the internet that tells you that salary income goes on Line 7, you know it’s out of date!
When you are reporting a sale of stock or another security, you still first report it on IRS Form 8949 (if needed for the tax-basis adjustment) and enter the totals from 8949 on Schedule D. That part has not changed. However, Form 1040 no longer has a line labeled "Capital gain or (loss)." In comments on the draft revision of Form 1040, this blogger urged (to no avail) the IRS to add it back to the main lines on Form 1040, given that gains from security sales are now a major source of income for many middle-class and affluent taxpayers.
With the new forms, you follow a different route. The total from Schedule D is now entered on Line 13 of the new Schedule 1 ("Additional Income and Adjustments to Income").
You attach Schedule D to Schedule 1. Totals from all the lines on Schedule 1 funnel into Form 1040 as part of the amount reported on Line 6 ("Total income").
The Tax Cuts & Jobs Act makes it much harder to trigger the AMT, so it makes sense that the IRS moved the AMT reporting from the surface Form 1040 to the metaphorical desk drawer of a supplementary schedule (Schedule 2). While the alternative minimum tax (AMT) remains a concern for anyone with incentive stock options (ISOs), is no longer directly reported on Form 1040 from the calculation on Form 6251. Instead:
- The AMT, if owed, from the Form 6251 calculation now goes into Line 45 of Schedule 2 ("Tax"). Attach Form 6251 to Schedule 2. The totals from this schedule go into Line 11 of Form 1040.
- Form 6251 has new numbers for all of its lines. The spread at ISO exercise is reported on Line 2i (previously Line 14). When the ISO stock that triggered the AMT is sold, the difference from the ordinary tax is reported on Line 2k (previously Line 17).
- The AMT credit that is generated for an ISO exercise that triggers the AMT is recouped through Form 8801, as in the past. The amount from Line 25 of Form 8801 now goes into Schedule 3 ("Non-Refundable Credits") on Line 54 (check box b). The totals from Schedule 3 go into Line 12 of Form 1040.
Rules For Cost-Basis Reporting for Stock Sales
For stock sales, there is no change in the IRS rules on how the cost-basis information is reported on Form 1099-B and Form 8949. 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. This creates confusion and complications with tax-return reporting, as only the exercise cost appears on the 1099-B, and with restricted stock/RSUs the cost basis on the 1099-B is therefore zero or blank.
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 the Tax Center at myStockOptions.com.