If you pay estimated taxes, remember this quarter's filing deadline (September 16). It's easy to forget amid seasonal changes such as the return of the school year and the start of fall sports. It also brings up the topic of recent changes in IRS forms and requirements. While taxes will never be as exciting as a good football run, the IRS too has made a couple of adroit moves recently.
Estimated Taxes: Some Relief For The Weary
When you recognize income from nonqualified stock options, restricted stock/RSUs, performance share awards, or cash bonuses taxes are withheld by your company at the flat rate for supplemental income withholding: 22% (the rate is 37% on aggregate yearly supplemental income above the threshold of $1 million). However, depending on your tax bracket, the minimum withholding may not be enough. In that case, you may need to make quarterly estimated tax payments.
Generally, federal tax law requires you to pay at least 90% of your income tax liability through either withholding or quarterly estimated tax payments, unless you paid 100% of the tax you owed the previous year (110% for income over $150,000). The penalty for failing to pay enough estimated tax is the payment of interest (at stated federal rates) on the amount of underpaid taxes.
For 2018 taxes, the IRS lowered that 90% requirement to 80%. It also removed the requirement that estimated tax payments be sent in four equal installments. Now the IRS has further announced it is automatically waiving the estimated tax penalty for the more than 400,000 eligible taxpayers who already filed their 2018 federal income tax returns but did not claim the waiver at the lower threshold. That should provide some relief for many employees with equity comp who had to pay estimated taxes last year.
See an FAQ on myStockOptions.com for strategies related to estimated tax payments on income from stock options and restricted stock/RSUs.
Tax Returns: After Criticism, IRS Restores Capital Gains Totals To Form 1040
Looking ahead to next tax season, the IRS recently made another smart move. As this blog reported earlier this year, last tax season you did not directly report capital gains and losses on your Form 1040 tax return. Instead the capital gains total from Schedule D was reported on the new Schedule 1, with totals from that Schedule going onto the revised Form 1040. Now, in the newly released draft Form 1040, total capital gains (or losses) is back on the body of the form (see Line 6) and not the schedule.
It's easy to criticize the confusion caused last year by the IRS. The experiment with capital gains reporting turned out to be unpopular. However, the agency was under intense political pressure to fashion a "postcard-sized" tax return to coincide with the federal tax reforms introduced in 2018; and the way the IRS has learned and moved on from that experiment could actually be considered entrepreneurial.
The change in the Form 1040 reporting was both innovative and disruptive; with keen responsiveness, the IRS listened to the marketplace after the initial "product" failed to gain favor. The IRS carefully weighed public comments, including those submitted by us at myStockOptions.com. It eventually realized that taking away certain lines which used to fit on the two full main pages of Form 1040, and scattering them across attached schedules instead, made tax returns (and understanding your sources of income) more confusing for taxpayers, tax preparers, and financial advisors.
myStockOptions.com will continue to monitor IRS developments as the 2020 tax-return season approaches. Our Tax Center has a section on tax changes that you can peruse for details on all the recent tax updates that affect equity compensation and company stock.
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