Once again, the IRS has assigned us all homework due by April 15. However, tax-return reporting has changed yet again for the 2021 tax-return season (income received in 2020). Meanwhile, the impact of the 2018 changes in tax rates and brackets continues.
Below are the key tax-return changes to know for Tax Season 2021. They apply to anyone who in 2020 received income from stock compensation, such as stock options, restricted stock units, or an employee stock purchase plan, or who had gains from sales of company stock in 2020.
For complete guidance on all aspects of tax-return reporting for stock comp and sales of company shares, including our popular annotated diagrams of IRS Form 8949 and Schedule D, see the Tax Center at myStockOptions.
The Changes In Brief
- After being condensed to just 24 lines in 2018, the IRS Form 1040 for 2020 has expanded to 38 lines.
- New lines include those for the Recovery Rebate Credit (stimulus check) and for estimated tax payments, sometimes made by taxpayers who have stock compensation.
- Total capital gain or loss from Schedule D is entered on a different line of Form 1040.
- The totals on Schedule 2 and Schedule 3 are entered on different lines of Form 1040. This applies to anyone with incentive stock options (ISOs) who has triggered the alternative minimum tax (AMT).
- For nonemployees, such as outside directors getting stock grants, income is now reported on IRS Form 1099-NEC, not Form 1099-MISC
Capital Gain Or Loss
If you sold shares during the 2020 tax year, you enter each sale on Form 8949 and report the total on Schedule D. You now report that Schedule D total on Line 7 of Form 1040.
This moved from Line 6 on the 2019 form—making this the third straight year capital gains reporting has changed on Form 1040.
Alternative Minimum Tax
A concern for anyone with ISOs, the alternative minimum tax (AMT) is calculated on Form 6251. The spread at ISO exercise, when the shares are held through the calendar year of exercise, is reported on Line 2i. When the ISO stock that triggered the alternative minimum tax is sold, the difference from regular tax is reported on Line 2k.
You enter your Form 6251 calculation on Line 1 of Form 1040's Schedule 2 (“Tax”). You attach Form 6251 to Schedule 2. The totals from Part I of Schedule 2 go into Line 17 on Form 1040. This has changed from Line 12b on the 2019 form.
The AMT credit that is generated for an ISO exercise that triggers the AMT is recouped through Form 8801, as it was in the past. The amount from Line 25 of Form 8801 goes into Schedule 3 (“Non-Refundable Credits”) on Line 6 (check box b). The totals from Part I of Schedule 3 go into Line 20 of Form 1040. This has changed from Line 13b on the 2019 form.
Recovery Rebate Credit
To mitigate the economic impact of the pandemic, Congress provided two stimulus checks/economic-impact payments that were based on income from 2019 tax returns (or 2018 if your 2019 return was not available for the first check). The amount received for the first check and/or the second payment is phased out according to income in that prior year.
Because of income spikes from stock compensation in recent years, you may not have qualified for this federal assistance, even if you were laid off or furloughed during 2020. Should this be your situation, you can instead claim the Recovery Rebate Credit on Line 30 of Form 1040.
In further good news, you have no recapture of the stimulus checks you received, should your 2020 income be higher than in the past, perhaps (again) from stock compensation or shares you sold after your company’s IPO. See the Form 1040 instructions for the Recovery Rebate Credit Worksheet. If you received IRS Notice 1444 (“Your Economic Impact Payment”) for the first stimulus check or IRS Notice 1444-B for the second, have these available when completing the worksheet to do the calculation.
Estimated Taxes
The flat rate for federal supplemental withholding that applies to stock compensation, such as a vesting of restricted stock or RSUs (22% and 37% for amounts over $1 million), may not cover the actual taxes you owe according to your marginal tax rate. You may then have paid estimated taxes. On the 2020 Form 1040, estimated tax payments are now reported on Line 26. This differs from last year, when they were reported on Schedule 3.
Rules Of Cost-Basis Reporting For Stock Sales
For stock sales, there is still 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 as part of Box 1 on Form W-2) as part of the cost basis reported on Form 1099-B. This creates tax-return confusion and complications, as only the exercise cost (i.e. what you paid for the shares) appears on the 1099-B. To avoid the risk of overpaying taxes, you need to make an adjustment on Form 8949.
This means that for restricted stock/RSUs, confusingly, the cost basis reported on Form 1099-B is zero or the box is left blank. However, the correct cost basis is the value of the shares at vesting. That is what you need to report on Form 8949.
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