Section 83(b) Election: Official IRS Form Coming Soon!

Update (Nov. 8, 2024): The IRS has officially introduced its new form for the Section 83(b) election, Form 15620.

Today we bring you news of a different election: the Section 83(b) election, a tax move that is available for restricted stock and early-exercise stock options. Last month, at the annual conference of the National Association of Stock Plan Professionals (NASPP) in San Francisco, a staff lawyer with the IRS Office of Chief Counsel revealed that the agency is finalizing an official IRS form for the Section 83(b) election.

In the equity comp world, this is a very big deal. There are various scenarios with equity compensation—specifically restricted stock, stock options, and LLC interests—in which making a timely Section 83(b) election with the IRS can be an important move for tax planning and minimization. However, currently no official IRS form exists for making that election.

Three Scenarios Involving The Section 83(b) Election

Below are three situations in which a Section 83(b) election is an action to consider.

Grant Of Restricted Stock

Grants of restricted stock are made by public companies and by private companies in the early startup stage (sometimes called founders’ stock). When you receive a grant of restricted stock, the grant must vest before you own the shares. Normally, the value of the grant is taxed at the time of vesting. However, you can instead choose to pay tax on the value of the stock at grant (minus anything you paid for the stock) by making a Section 83(b) election with the IRS within 30 days of the grant date.

Essentially, by making the 83(b) election you are betting that the stock will appreciate substantially between grant and vesting, so you choose to be taxed on what you hope will be the lower value at grant. Additionally, you make an early start on the one-year holding period you must meet to be taxed at the long-term capital gains rate (lower than the short-term rate) when you sell the shares.

Note that the 83(b) election is not available for restricted stock units (RSUs).

Early-Exercise Stock Options

For employees in private companies who receive early-exercise stock options, i.e. options that can be exercised before vesting, an 83(b) election within 30 days of exercise is needed to change the regular tax treatment. You essentially purchase restricted stock with the same vesting schedule that the options had and pay taxes at exercise on any income from the spread (i.e. the difference between the stock’s fair market value and the exercise price). You also get an early start on the holding period for long-term capital gains.

LLC Interests

A limited liability company (LLC) has membership interests rather than shareholders. It can make equity-compensation-type grants in the form of profits interests or capital interests. Profits interests are more common, particularly for private-equity-backed companies.

Depending on how the grants are structured (a complex topic beyond the scope of this article), most tax professionals recommend an 83(b) election within 30 days of grant. With the right structure, these interests often have zero value at grant—i.e. no taxable income at that time—and long-term capital gains tax treatment at sale when the interests are held long enough.

Timing Of 83(b) Election Is Crucial

To be valid, a Section 83(b) election must be mailed to the IRS within 30 days of the grant date for restricted stock and LLC interests or the exercise date for early-exercise options. You send it by certified mail (return receipt requested), postmarked within that 30-day period, to the IRS Service Center where you file your tax return.

Currently, however, the IRS does not have an official form for the 83(b) election. You make the election in correspondence to the IRS that you or your tax advisor prepare, including all of the required information as indicated by guidance from the IRS. You also give a copy to your company.

This approach increases the risk of improperly filing the election or missing the deadline, which would make it invalid. Once the 30-day window has elapsed, you can’t make the 83(b) election to be taxed at the earlier time—with painful tax consequences should the underlying equity’s price later surge.

83(b) Election Carries Risks

The Section 83(b) election has risks. Once you have made the election and paid taxes, you cannot get those taxes back from the IRS if your employment ends before vesting or the equity becomes worthless. Should one of those outcomes occur, you may end up paying taxes on income that you never receive!

Moreover, unless you can prove to the IRS that you made a “mistake of fact” (very difficult to do), it’s almost impossible to revoke an 83(b) election after the initial 30-day election window of time. Therefore, you should speak with a tax professional (CPA, Enrolled Agent, lawyer) to be sure you understand how and why you are making this tax election.

New IRS Form Will Make 83(b) Election Much Easier

The welcome new Section 83(b) election form, expected to be IRS Form 15620, will be available as a downloadable PDF with fields for all the required information. I discovered that this new tax form is already listed in the long document table in an early September IRS notice on various topics published in the Federal Register. 

At first, the form will be mailed to the IRS, but under the IRS modernization program it will eventually be submissible by e-filing. The new form is far along in its development, I was told in a separate discussion with my IRS source, and it may be released this year.

See myStockOptions.com for more details on taxation, planning, and risks with the 83(b) election and on early-exercise stock options in startup/pre-IPO companies.

SPECIAL WEBINAR

Year-End & Year-Start Equity Comp Financial Planning

Thursday, Nov. 14 (2pm–3:40pm ET, 11am–12:40pm PT). See the webinar registration page for a detailed agenda. 2.0 CE hours for CFP, CPWA/CIMA, CEP, CPE, and EA

Join us for this lively webinar on year-end 2024 and year-start 2025 strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes. In 100 minutes, a panel of leading financial advisors will present practical insights and real-world case studies:

• John P. Barringer (CFP®), Executive Wealth Planning
• Rebecca Conner (CFP®, CPA/PFS™, RLP), Founder, SeedSafe Financial LLC
• John Owens (CFP®, EA, ECA, CPWA®), Managing Partner, Brooklyn FI

Uncertainty about tax rates as the TCJA sunsets and the unpredictable future of the current stock-market boom make the need for expert guidance more important than ever, as this webinar will cover.

Register now. Time/date conflict? No problem! All registrants get the webinar recording, slide deck, and handouts.

Tax Return Checklist: 7 Ways To Prevent Costly Mistakes With Stock Options, Restricted Stock, And ESPPs

This is a revised version of a blogpost that was accidentally sent by email on Monday.

Be prepared. Income from nonqualified stock options, restricted stock units, an employee stock purchase plan (ESPP), or related sales of company stock will complicate your tax return.

Nobody likes doing homework for the IRS, but the handy checklist in this article can make the assignment easier for tax returns involving equity compensation and company stock sales. Even if you hire a professional preparer to handle your tax return, such as a CPA or enrolled agent, check your return for these items. You don’t want to overpay taxes or draw unwanted IRS attention that leads to a scary notice or audit.

1. Compensation Income

Stock compensation, along with your salary income, is included in what is reported in Box 1 of your Form W-2. You enter the amount in Box 1 on Line 1a of Form 1040.

Alert: Be sure you don’t double-report any stock compensation income that also appears in Box 12 or 14 of your W-2 (or on a paystub).

2. Stock Sales: Capital Gain Or Loss

After you sell stock during the tax year, the sales are reported on Form 1099-B from your broker (or the broker's equivalent substitute statement). You use the information on the 1099-B to complete IRS Form 8949 and then Schedule D of Form 1040.

• Form 8949 is where you list the details of each stock sale
• Schedule D aggregates the column totals from this form to report your total long-term and short-term capital gains and losses
• You take the total capital gain or loss on Schedule D and enter it on Line 7 of your Form 1040 tax return

You report the Schedule D capital gain/loss total on Line 7 of Form 1040.

Even if you sold shares immediately at exercise, vesting, or purchase for no additional gain beyond what’s on your W-2, you still separately report each sale.

Alert: Should you not report the sale, the IRS will almost certainly send you a notice demanding taxes on the full amount of your unreported sale proceeds. That would require you to potentially amend your tax return or engage in ongoing communications with the IRS to explain the situation. Not fun.

3. Cost Basis Of Company Stock Sales

Here comes the tricky part: adjusting the cost basis (or tax basis) of equity awards, i.e. the full cost of shares that generated compensation income. The cost basis is subtracted from your proceeds to calculate your gain or loss for tax purposes.

For shares bought in the open stock market, your cost basis is the purchase price. With equity compensation, the basis calculation includes the cost plus any compensation income recognized—for example, the exercise spread of nonqualified stock options (NQSOs) or the value of the shares at the vesting of restricted stock units (RSUs).

Form 1099-B reports your basis in Box 1e. Instead of boxes, your broker’s substitute statement will use columns numbered the same as the boxes on Form 1099-B. The same numbering is used on Form 8949.

However, the cost-basis information reported to the IRS by your broker in Box/Column 1e of Form 1099-B may be too low, or the box may be blank. IRS rules do not allow your broker to include the compensation income in the basis that’s reported on the 1099-B.

Alert: If the basis listed on the 1099-B is your option exercise price or your ESPP purchase price (or simply $0), then it is likely to be incomplete. You are at risk of overpaying your taxes. An adjustment will be needed on IRS Form 8949, which is used to report the sale, and its totals then funnel into Schedule D. For insights on what to do, see tip #2 in another article in this blog: Tax Returns: 4 Big Mistakes To Avoid With Stock Options, RSUs, And Stock Sales. The Tax Center at myStockOptions has comprehensive guidance about adjusting the cost basis on Form 8949.

4. Alternative Minimum Tax (AMT)

For a few years now, the alternative minimum tax (AMT) has not had its own line on the main Form 1040—but that doesn’t mean it’s gone away! The AMT remains a concern for everyone with incentive stock options (ISOs). It is calculated on Form 6251:

• Exercise year: The spread at ISO exercise is reported on Line 2i if the stock was not sold during the calendar year of exercise.
• Sale year: After you sell ISO stock that triggered the AMT, the difference from the ordinary income tax is reported on Line 2k.

If your AMT is higher than your regular tax, you report this additional amount from your Form 6251 calculation on Line 1 of IRS Schedule 2 (“Additional Taxes”). The totals from Part I of Schedule 2 go into Line 17 on Form 1040.

After you trigger the AMT from an ISO exercise, you get an AMT credit that you can apply in every subsequent year when your ordinary income tax exceeds your AMT. You use Form 8801 to calculate how much of the credit you can apply each year. You carry forward the rest.

Alert: You do not need to sell the ISO stock to start using up the AMT credit. You continue to complete Form 6251 and 8801 each year until the credit is used up.

5. Equity Comp Income Left Off W-2

What if your company does not report your employee stock compensation income on Form W-2? According to recent changes to Schedule 1 of Form 1040 and its instructions, the amount goes in the “Other Income” section on Line 8k (“Stock Options”).

If you are not certain that all equity compensation left off the W-2 goes on Line 8k, then it can fit into Line 8z (“Other Income. List type and amount”).

6. Estimated Taxes

The flat 22% rate often used for federal supplemental withholding on employee stock compensation may not cover the actual taxes you owe, given your marginal tax rate. You may have decided to pay estimated taxes to cover the additional taxes owed. On Form 1040, you report estimated tax payments on Line 26.

7. IRS Form 1099-NEC For Nonemployees

Nonemployees, such as consultants and directors, have no withholding and no W-2 reporting for stock comp income. Income from exercise or vesting appears on IRS Form 1099-NEC (“Nonemployee Compensation”) as self-employment income. This is shown in Boxes 1 and 7 of Form 1099-NEC. You report that income on Schedule C of your Form 1040 tax return.

As this is self-employment income, you also need to calculate on Schedule SE any Social Security and Medicare taxes that you owe.

Further Resources

The Tax Center at myStockOptions.com has resources devoted to tax returns involving equity compensation, including annotated diagrams of Form W-2, Form 3921, Form 3922, and Form 1099-NEC. For stock sales, annotated diagrams of Form 8949 and Schedule D show you how to report sales to adjust for an incomplete cost basis.

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myStockOptions On-Demand Webinar Provides Expert Insights And Case Studies

The 2024 version of our popular annual webinar on tax returns involving equity comp and stock sales, featuring a panel of tax experts, is available on demand for immediate access. Get valuable insights and actionable takeaways from tax experts to sharpen your knowledge and help you avoid errors that can lead to overpayments or unwanted IRS attention. Case studies include ways to use the information on tax returns to create better financial plans. The webinar recording offers 2 CE credits for CFP, CPWA/CIMA, and CEP/ECA.

Panelists:

• Stephanie Bucko, CPA, CFA®, Mana Financial Life Design
• Dan Hodgin, CPA, Silicon Valley Tax Group
• Daniel Zajac, CFP®, EA, Zajac Group
• moderator: Bruce Brumberg, JD, editor-in-chief of myStockOptions

A detailed agenda is available at the webinar registration page.

Tax Season 2024: Take The Stress Out Of Filing With myStockOptions Tax-Return Resources

Tax Season 2024 is upon us. The tax reporting for stock comp income can be complex amid the current uneven stock markets, ongoing economic uncertainty, and increase in IRS resources for audits. Taxpayer mistakes can lead to overpaid tax, underreported income, or IRS penalties.

myStockOptions is here to help with its fully updated Tax Center. Our goal is to help you realize the full potential of stock options, restricted stock, RSUs, and ESPPs by educating you and your advisors about tax rules and helping to prevent errors. The last thing you want is to pay too much tax or incur penalties from the IRS or your state that take yet more money out of your pocket. Especially with the increase in IRS firepower and its targeting of wealthier taxpayers to boost Treasury revenue, that is a pressing concern.

myStockOptions Tax Center Provides Valuable Tax-Return Resources

An article and FAQ summarize changes in forms and reporting that taxpayers with stock compensation must know:

• Tax Season 2024: What You Must Know About Reporting Rules
• What do I need to know for the 2024 tax-return season?

Other core articles and FAQs spell out the most common mistakes people make with stock grants on their tax returns. These include:

• 12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs
• Restricted Stock & RSUs: 10 Mistakes To Avoid On Your Tax Return

You, your financial advisor, and your CPA or EA can quickly run through these to be sure you submit error-free returns.

More in-depth resources of the Tax Center include the following:

• special FAQs with annotated how-to diagrams of IRS Form 8949 and Schedule D
• diagrams of Form W-2, Form 3922 (for employee stock purchase plans), and Form 3921 (for incentive stock options)
• a fun interactive quiz on tax-return topics that lets you test your reporting knowledge in a painless way, before you file your return, and links to related content from the answer key
• an animated video guide to avoiding costly mistakes that can lead to the overpayment of taxes on stock sales.
• engaging podcasts with tips for tax returns

myStockOptions On-Demand Webinar Provides Expert Insights And Case Studies

On February 14, we held our popular annual webinar on tax returns involving equity comp and stock sales, featuring a panel of tax experts. The webinar is now available on demand for immediate access. Get valuable insights and actionable takeaways from tax experts to sharpen your knowledge and help you avoid errors that can lead to overpayments or unwanted IRS attention. Case studies include ways to use the information on tax returns to create better financial plans. The webinar recording offers 2 CE credits for CFP, CPWA/CIMA, and CEP/ECA.

Panelists:

• Stephanie Bucko, CPA, CFA®, Mana Financial Life Design
• Dan Hodgin, CPA, Silicon Valley Tax Group
• Daniel Zajac, CFP®, EA, Zajac Group
• moderator: Bruce Brumberg, JD, editor-in-chief of myStockOptions

A detailed agenda is available at the webinar registration page.

Tax Returns: 4 Big Mistakes To Avoid With Stock Options, RSUs, And Stock Sales

Tax returns involving income from equity comp and stock sales are prone to mistakes that can lead to overpaid tax, overreported income, IRS penalties, or even an IRS audit. Ouch.

The myStockOptions webinar Preventing Tax-Return Errors With Stock Comp And Stock Sales, held live on March 3 and now available on demand, featured insights from a panel of tax experts and financial advisors on how to avoid errors with tax returns involving income from equity compensation and sales of company shares.

Below are four costly tax-return mistakes to avoid, with some of the commentary they provided during the webinar.

Mistake #1: Not Reporting Stock Sales On Form 8949/Schedule D

After you sell stock during the tax year, you must complete IRS Form 8949 when adjustments are needed, and then Schedule D.

• Form 8949 is where you list the details of each stock sale
• Schedule D aggregates the column totals from this form to report your total long-term and short-term capital gains and losses
• You take the total capital gain or loss on Schedule D and enter it on Line 7 of your Form 1040 tax return

Even with a cashless exercise of stock options in which all the income appears on your Form W-2 and you seem to have no additional gains on the sale, be sure you report the sale. In some cases with a cashless exercise, you may have a small short-term gain or loss, depending on how your company calculates your exercise income and the brokerage commission. What if there actually is no additional income from your sale beyond what’s on your Form W-2? You still need to report that sale on Form 8949 and Schedule D.

The IRS has expanded its technology over the past few years. Its computers can easily match and compare e-filed information documents (e.g. Form 1099-B) against filed tax returns. If you don’t report these sales, you can expect a scary letter from the IRS (CP2000 Notice) about owing taxes on the full amount of the proceeds from the unreported stock sales.

What should you do if that happens? “We send a response with all the supporting documents,” said webinar panelist Dan Hodgin, a CPA and the owner of Silicon Valley Tax Group. “It basically says hey, this is what happened, this is why we think your notice is incorrect, and here are the attached supporting documents. If that doesn’t work, we’ll amend the return. But a lot of times, with just a response the IRS will adjust it in its computers and will issue an updated notice with corrected terms.”

Mistake #2: Not Reporting Your Cost Basis Correctly

The cost basis, sometimes called the tax basis, is the full cost of acquiring a security. This is a big area for potential errors on tax returns, made more likely by confusing IRS rules that apply to stock compensation. When you sell shares, the sales price (after commissions) minus your cost basis equals your capital gain or loss:

NET PROCEEDS – COST BASIS = CAPITAL GAIN OR LOSS

If the cost basis is too low, you overpay taxes.

Form 1099-B reports your cost basis in Box 1e (your broker’s substitute statement will use columns with the same numbering), without including any compensation income you recognized from equity awards. This means the cost-basis information reported to the IRS in Box 1e of Form 1099-B may be too low, or the box may be blank.

In addition, brokers are prohibited from giving any cost basis for shares that were not acquired for cash (i.e. “noncovered securities” in IRS parlance). That includes shares acquired at vesting from a grant of restricted stock/RSUs or in a stock-swap option exercise.

Unfortunately, this confusing situation is rife for mistakes on tax returns. When reporting sales of shares that were acquired from restricted stock or RSUs, taxpayers may wrongly think the cost basis is $0. That is because on Form 1099-B, Box 1e for the cost basis will probably be blank or show $0.

However, your cost basis is the amount of income included on your Form W-2 in the year when the restricted stock/RSUs vested. As illustrated by annotated diagrams of Form 8949 and Schedule D at the website myStockOptions.com, instead of putting $0 in the cost-basis column (e) of Form 8949 and then making an adjustment in column (g), you put the correct full basis in column (e).

How can you keep track of your cost basis accurately? During the webinar, panelist Stephanie Bucko, a CPA and the co-founder of Mana Financial Life Design, recommended taking screenshots during the stock-selling process as an extra record of “exactly what happened at that time.” Dan Hodgin added that “most of the brokerage houses will give you supplemental information along with your Form 1099-B, so that’s a roadmap to make sure everything is correct.”

Dan suggested paying attention to the number of short-term capital gains you have. Having a lot of short-term sales “usually is a red flag that there needs to be an adjustment in the cost basis.” He also said that his firm checks Form W-2 for the difference between Box 1 (total of ordinary income) and Box 3 (Social Security and Medicare wages). “When there’s a difference there, that may be an indication that there’s some income in your W-2 that needs to be adjusted on your Form 8949.”

Dan also cautioned against moving stock compensation shares out of the original stock account that they’re in. “That’s when big mistakes happen, in my experience.” He observed that moving the shares from the account at the brokerage firm your company uses for its stock plan can cause the loss of historical data that you will later need to provide the correct cost basis for your tax return.

CFP and EA Daniel Zajac, the managing partner of Zajac Group, emphasized the importance of communication between your tax preparer and your financial advisor to ensure the cost basis is correct. “This is where coordination between an accountant and a financial advisor adds a lot of value,” he explained. “We’re working with the client throughout the year. It’s easier for an accountant to have a conversation with the financial advisor as opposed to figuring out the cost basis on the back end.”

Mistake #3: Double-Counting Income From Form W-2

Don’t get confused by your Form W-2 and overreport income. When you exercise nonqualified stock options (NQSOs), the difference between your exercise price and the stock’s market price is ordinary income, even if you hold the shares and don’t immediately sell them. That ordinary income for employees is included in Box 1 of your Form W-2 and in the other boxes for state and local income, Social Security up to the yearly maximum, and Medicare, along with the amount withheld. When restricted stock/RSUs vest—again, even if you don’t sell any shares—the value of those shares is ordinary income and included in Box 1 of your W-2 with your other compensation and in the other boxes for state and local income.

That’s pretty straightforward. Here’s where it gets tricky. Companies also must single out income from NQSOs and nonqualified ESPPs by putting it in Box 12 of Form W-2, using Code V. For other equity grants, some companies voluntarily report stock compensation income in Box 14.

Therefore, don’t make the mistake of separately reporting the amount that appears in Box 12 of your W-2 or that may appear in Box 14. It’s already included in the Box 1 income that you report on Line 1 of Form 1040. Adding it on top of the income already reported would cause that income to be taxed twice.

To double-check how much compensation came from salary and how much from options or RSUs, compare your year-end salary paycheck stub with your W-2. The difference between the two statements should reveal your stock comp income.

Webinar panelist Stephanie Bucko actually logs into the brokerage account with her clients to recover the necessary documents and information. “We’re always tracking their balance sheets to make sure we have a full list for when they’re providing their CPA with the documents for the tax return.”

Dan Zajac echoed the importance of historical data on various forms for his clients at tax time, not only for their tax returns but also for their financial planning. “It’s all about data-gathering,” he said during the webinar. “We’re having the conversation about goals, objectives, risk tolerance, investments. But on the flip side, we’re looking for actual data. Give us statements, tax returns, pay stubs, W-2s, and everything. For people with equity comp, we want to see where you are now, but it’s equally important to understand what’s already happened. We need all those pieces of the puzzle. After we’ve reviewed the previous year’s tax return, what can we do to plan for the next year?”

Mistake #4: Forgetting About The Share Withholding For Restricted Stock/RSUs

For tax withholding when a grant of restricted stock/RSUs vests, many companies require shares to be automatically held back to cover the taxes, or at least make it the default method. “It’s definitely confusing for people,” said Stephanie Bucko. “They think they’re vesting, say, 2,000 shares and then they receive only 1,200 in their account.”

Should you report withheld shares on your tax return? In general, if you do not receive a Form 1099-B for the shares withheld, most tax preparers do not report them. “For the most part, brokerage houses do not report the withheld shares on a 1099-B,” confirmed webinar panelist Dan Hodgin. However, when there is an actual same-day sale of shares to cover the taxes, you do always report the stock sales.

After you have later sold the shares that you received from that grant, remember to exclude from your Form 8949 those shares that were withheld for taxes (i.e. do not use the full number of granted shares). Otherwise, you will later report on your Form 8949 and Schedule D more shares than you actually sold.

More Pro Tips

For more expert insights on tax returns involving stock compensation, including incentive stock options (ISOs) and the alternative minimum tax (AMT), see the Tax Center at myStockOptions.com. The myStockOptions webinar in which these tax pros spoke, Preventing Tax-Return Errors With Stock Comp And Stock Sales, is available on demand at the myStockOptions Webinar Channel.

Lastly, when in doubt, hiring a professional tax-return preparer who is familiar with the tax rules for employee stock options and other types of equity and executive compensation can be a smart investment for peace of mind. Professional expertise can greatly help to prevent avoidable errors on your income tax return. Furthermore, “if you do receive any IRS notices about your tax return, it’s helpful to have someone who speaks ‘IRS’ to efficiently respond,” points out Michael C. Gray, a CPA in San Jose (California) and a co-author of the book Secrets Of Tax Planning For Employee Stock Options.

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WEBINAR: Stock Compensation Bootcamp For Financial Advisors

March 30, 2pm–3:40pm ET, 11am–12:40pm PT
2.0 CE credits for CFP, CEP, CPWA/CIMA, and EA

In 100 minutes, this lively webinar covers the basics of all the major forms of equity comp, plus sales of the related company shares, and explains planning strategies for financial advisors with clients who have stock compensation. Whether advisors are new to equity comp or want to sharpen their knowledge, this webinar will provide practical info and insights to maximize their success with clients.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

Tax Season 2022: myStockOptions Tax Center And Webinar Have Key Guidance To Help Prevent Costly Mistakes

Once again, the IRS has assigned us all homework due by mid-April. For tax returns involving equity comp and stock sales, the reporting has changed yet again for the 2022 tax-return season (income received in 2021). The changes, including where to put income left off Form W-2, expand what you must understand before you prepare your tax return.

With these and the many other tax changes of recent years, the 2022 tax-filing season presents more risk than ever for expensive errors on tax returns. Taxpayer mistakes can lead to overpaid tax, underreported income, IRS penalties, or even an IRS audit.

myStockOptions Tax Center: Valuable Tax-Return Resources

The fully updated myStockOptions Tax Center provides expert yet easily readable guidance on the filing and reporting of tax returns that involve stock options, restricted stock, restricted stock units (RSUs), performance shares, stock appreciation rights, and employee stock purchase plans (ESPPs).

An article and FAQ summarize changes in forms and reporting that taxpayers with stock compensation must know:

• Tax Season 2022: What You Need To Know About New Reporting Rules
• What's new for the 2022 tax-return season?

Other core articles and FAQs spell out the most common mistakes people make with stock grants on their tax returns. These include:

• 12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs
• Restricted Stock & RSUs: 10 Mistakes To Avoid On Your Tax Return

You, your financial advisor, and your CPA can quickly run through these to be sure you submit error-free returns.

To get even more in-depth help with tax returns:

• The reporting of stock sales is made clear by special FAQs with annotated how-to diagrams of IRS Form 8949 and Schedule D.
• Diagrams of Form W-2, Form 3922 (for employee stock purchase plans), and Form 3921 (for incentive stock options) show how companies report equity compensation income to employees.
• An animated video explains how to avoid costly mistakes that can lead to the overpayment of taxes.
• Engaging podcasts convey tips for tax returns.
• A fun interactive quiz on tax-return topics lets users test their reporting knowledge in a painless way, before they file their returns, and links to related content from the answer key.

On-Demand Webinar About Preventing Tax-Return Mistakes

Held live on March 3 and now available on demand, the myStockOptions webinar Preventing Tax-Return Errors With Stock Comp And Stock Sales features insights from a panel of tax experts on how to avoid errors with tax returns involving equity comp and sales of company shares. It also offers special insights from panelist case studies on how to use information in tax returns to create better financial plans. The webinar recording offers 2.0 CE credits for the CFP, CEP, and CPWA/CIMA designations.

Panelists:

• Stephanie Bucko, CPA, CFA®, Mana Financial Life Design
• Dan Hodgin, CPA, Silicon Valley Tax Group
• Daniel Zajac, CFP®, EA, Zajac Group
• moderator: Bruce Brumberg, JD, editor-in-chief of myStockOptions

A detailed agenda is available at the webinar on-demand page.

Know Before You File

Remember that accountants and tax advisors sometimes make mistakes, so even if your return is being handled by a preparer, it's good to know the reporting. The last thing you want for your tax return is to pay too much tax, incur IRS penalties, or draw unwanted IRS attention leading to an audit.

Changes In IRS Form 1040 Affect Tax Returns Involving Stock Options, RSUs, ESPPs

As if tax returns involving stock compensation weren't complicated enough to begin with, tax-return reporting has changed yet again for the 2022 tax-return season. If you had income in 2021 from equity compensation, whether from stock option exercises, restricted stock/RSU vesting, or sales of company stock, this article explains what you need to know about IRS tax returns in the 2022 tax season.

The Changes In Brief

While the IRS Form 1040 for 2021 remains at 38 lines, changes have been made in its supporting forms. In 2018, the IRS condensed Form 1040 from its prior 79 lines in an effort to make it “postcard size.” It shifted many of those lines to supporting “schedules” that funnel information to Form 1040. The IRS has made changes in some of those schedules:

• Schedule 1 (“Additional Income and Adjustments to Income”) is where you should enter (under the expanded entries for “Other Income”) the amount of any stock compensation you earned as an employee that was mistakenly omitted from your Form W-2. In the past, it was unclear where and how to report this income.
• Schedule 2 (“Additional Taxes”) now has dedicated lines for amounts coming from the tax form for the Additional Medicare Tax on compensation income and the tax form for the Net Investment Income Tax (e.g. on capital gains and dividends from company stock).
• Schedule 3 (“Additional Credits and Payments”) now has a specific line for any credit for prior minimum tax. This would apply to anyone with incentive stock options (ISOs) who has triggered the alternative minimum tax (AMT).
• The totals on Schedule 1, Schedule 2, and Schedule 3 of Form 1040 appear on different lines on those schedules, but are entered on the same lines of Form 1040.

Highlights Of Form 1040

For the reporting of stock comp income and sales of shares, below are key aspects of the Form 1040 tax return and its associated schedules and forms, along with other details of the changes outlined above for the 2022 tax season.

1. Compensation. Stock compensation, along with salary income reported on Form W-2, is entered on Line 1 of Form 1040 (see image below).

2. Capital gain or loss. If you sold shares during the 2021 tax year, you enter each sale on Form 8949 and report the total on Schedule D. You then report that Schedule D total on Line 7 of Form 1040 (see image below). After three straight years in which capital gains reporting changed on Form 1040, it remains the same on the 2021 tax year return.

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. Brokers are prohibited from including equity compensation income 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.

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.

3. Alternative minimum tax (AMT). A concern for anyone with incentive stock options (ISOs), the AMT is calculated on Form 6251. The spread at ISO exercise is reported on Line 2i if the ISO stock was not sold in the calendar year of exercise. If the ISO stock that triggered the AMT was sold, the difference from the ordinary 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.

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 6b, “Credit for prior year minimum tax.” This is the first tax year the AMT credit has its own line on the schedule. The totals from Part I of Schedule 3 go into Line 20 of Form 1040.

4. Equity compensation income left off W-2. If your company does not report your employee stock compensation on Form W-2 and does not later send you a corrected W-2c, the revised Schedule 1 for the 2021 tax year indicates that the amount goes in the “Other Income” section on Line 8j (“Stock Options”).

The list of items “a” through “p” (plus “z”) under “Other Income” on Schedule 1 is new for the 2021 tax year. Previously, taxpayers listed the type of other income and the amount, or put the details in a supplemental attachment. The total for other income from Schedule 1 goes into Line 8 of Form 1040.

Alert: The IRS expects you to report and pay tax on income mistakenly left off your Form W-2. An error by your employer does not release you from that obligation.

In the instructions for Form 1040 (pages 86–87), the IRS directs that the section “Other Income” on Schedule 1 is where to put any employee stock option income that is not on your Form W-2 and is therefore not reported on Line 1 of Form 1040:

Line 8j—Stock options. Enter on line 8j any income from the exercise of stock options not otherwise reported on your Form 1040 or 1040-SR, line 1.

Before this development, some tax experts thought this “Other Income” category was not for compensation-related income (only for non-wage income). Instead, they believed taxpayers needed to add the unreported W-2 income to wages reported on Line 1 of Form 1040. However, a non-match of W-2 Box 1 and Form 1040 Line 1 can raise red flag with IRS computers.

“Clearly, stock option income left off the W-2 should not be reported on the ‘wages and salaries’ line on form 1040,” explains Elliott Puretz, a CPA and retired college accounting professor in the Boston area. “From my review of Schedule 1 and the worksheets that support it, it appears that Line 8j is the line for it.”

Unresolved issues with this change in Schedule 1 include the question of how broadly to read the IRS instructions. It can be assumed to apply to all stock options, and probably ESPPs too. The IRS often uses the term exercise for purchase and refers to ESPPs as stock options. However, the instructions do not address how to handle restricted stock/RSUs. For these equity awards it is the vesting that triggers the taxable event and no exercise applies. The IRS has not yet responded to my requests for clarification.

If you are not certain that all equity compensation earned as employee left off the W-2 goes on Line 8j, then it can fit into Line 8z (“Other Income. List type and amount”). “RSUs are not stock options, so any income for those not reported as wages would presumably be reported on line 8z,” suggests Michael Gray, a CPA in San Jose (California) and a co-author of Secrets Of Tax Planning For Employee Stock Options.

5. IRS Form 1099-NEC for nonemployees. For employees, tax withholding occurs at NQSO exercise or restricted stock/RSU vesting, and the income should appear on Form W-2, as explained above. For nonemployees, such as consultants and directors, there is no withholding and the income from exercise or vesting now appears on IRS Form 1099-NEC (“Nonemployee Compensation”) as self-employment income. (Before 2020, it was Form 1099-MISC.)

Income is reported on Form 1099-NEC in Boxes 1 and 7. You report this income on Schedule C of your Form 1040 tax return. As the income is self-employment income, you also need to calculate on Schedule SE any Social Security and Medicare taxes that you owe.

6. Estimated taxes. The flat rate for federal supplemental withholding that applies to stock compensation (22%, but 37% for amounts over $1 million) may not cover the actual taxes you owe according to your marginal tax rate. You may have paid estimated taxes because of additional income from restricted stock/RSU vesting, an NQSO exercise, an ISO exercise/sale, or an ESPP purchase/sale. On the 2021 Form 1040, estimated tax payments are reported on Line 26.

Additional Tax-Reporting Resources

For guidance on the tax-return reporting for stock compensation and sales of company shares, including annotated diagrams of Form W-2, Form 8949, Schedule D, Form 3921, and Form 3922, see the Tax Center on myStockOptions.com.

 

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WEBINAR: Preventing Tax-Return Errors With Stock Comp And Stock Sales

March 3, 2pm–3:40pm ET, 11am–12:40pm PT
2.0 CE credits for CFP, CEP, CPWA/CIMA, and EA

This tax season brings more risk than ever for expensive mistakes with tax returns involving stock compensation, including cost-basis reporting for stock sales.

Register for this lively educational webinar on tax-return topics for stock comp. In 100 minutes, the webinar features insights from a panel of tax experts on issues with tax returns involving equity comp and sales of company shares, including how to avoid costly mistakes. The panelists will also present real-world case studies on how to use information in tax returns to create better financial plans.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

Stock Comp Tax Returns: IRS Changes Form 1040 Again For 2021 Tax Season

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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WEBINAR: Preventing Tax-Return Errors For Stock Comp And Stock Sales

Mar 11, 2pm–3:15pm ET, 11am–12:15pm PT

Tax Season 2021 presents more risk than ever for confusion and costly errors with tax returns involving stock comp. Join us for a lively educational webinar on reporting rules for stock options, restricted stock/RSUs, ESPPs, and sales of company shares.

Learn how to avoid common mistakes that can lead to overpaying taxes or unwanted IRS attention.

Register now. All the essentials of tax returns for equity comp will be presented in just 75 fast-paced minutes.

Tax Time: Five Big Tax-Return Mistakes With Stock Options And How To Avoid Them

There's a lot going on right now. The last thing you want is headaches with your IRS tax return. Tax returns involving stock compensation are complicated, whether the income is from stock options, restricted stock units, an employee stock purchase plan, or sales of company shares acquired from equity comp. The special reporting issues can flummox even experienced accountants and financial advisors. Meanwhile, mistakes can lead to overpayment of taxes or (perhaps even worse) unwanted attention from IRS auditors.

myStockOptions is here to help. Below are five big reporting mistakes to avoid when you have compensation income from employee stock options or sell shares acquired from these grants. For more guidance on tax returns that involve stock compensation, whether stock options, restricted stock units, employee stock purchase plans, or performance shares, see the articles, FAQs, and annotated diagrams of IRS forms in the Tax Center at myStockOptions.com. Just for fun, try the tax-return quiz to test your knowledge.

Alert: The COVID-19 pandemic of 2020 has prompted the postponement of the April 15 tax-return deadline to July 15, both for filing and for the payment of any tax owed with your return. In other words, Tax Day 2020 is July 15. States that have income taxes are expected to make similar provisions for their state tax returns. Be sure to check with your state's tax agency/revenue department.

1. Nonqualified Stock Options: Double-Reporting Compensation Income

If you exercised nonqualified stock options (NQSOs) last year, you may mistakenly double-report income on your tax return if you do not realize that the income in Box 1 of your Form W-2  already includes the option exercise income. Your company reports this income separately in Box 12 of Form W-2, but it’s still part of the income in Box 1.

Wrongly thinking the income was left out of Box 1 may prompt you to erroneously report it as “Other income” on Schedule 1 of your tax return. Doing that would cause the income to be taxed twice as ordinary income, as the income is already included in the W-2 income that you report on Line 1 of Form 1040:

2. Failure To Report The Sale In A Cashless Exercise/Same-Day Sale

With a cashless exercise/same-day sale, the full exercise spread income is reported on Form W-2, and you report it on your tax return as ordinary income. Even though you never owned all the stock after exercise, you also need to report this transaction on Form 8949 and Schedule D. Those forms are used to report capital gains and losses on all stock sales with your Form 1040 tax return. You may even have some small gains or losses, depending on how your company calculates the spread at exercise and on any commissions and fees for the stock sale. For an annotated example of how to report the cashless exercise on Form 8949 and Schedule D of Form 1040, see an FAQ at myStockOptions.com.

Alert: 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 and Schedule D, it 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 CP2000 notice for the taxes due.

3. Cost-Basis Confusion

With nonqualified stock options, for employees the spread at exercise is reported to the IRS on Form W-2 For nonemployees, it is reported on Form 1099-MISC (starting with the 2020 tax year, it will be reported on Form 1099-NEC ). It is included in your income for the year of exercise. Income from an incentive stock option (ISO) disqualifying disposition, such as an early sale, will also appear.

The cost-basis part (Box 1e) of Form 1099-B from your broker will probably report only the exercise price as the cost basis. When you report the sale on Form 8949, do not list the exercise price as your cost basis without also making an adjustment in column (g) of Form 8949. Only for ISO stock sold in a qualifying disposition will the tax basis equal the exercise price.

Alert: If the cost basis is not reported on Form 1099-B, avoid double taxation by listing the market price on the date of exercise as your cost basis in the stock. The basis should be the exercise price plus the amount of ordinary income you already paid taxes on.

Each type of exercise method can create its own confusion with the reporting of shares sold either at exercise or later. For example, if you sold only some of the shares in a sell-to-cover exercise, you don't want to report on your Form 8949 the cost basis for all the shares exercised. This would result in a much larger tax basis and a capital loss for these shares sold.

4. Incentive Stock Options: Alternative Minimum Tax (AMT) Calculation

With incentive stock options (ISOs), when you exercise and hold through the calendar year of exercise, remember that you need to complete an AMT return (Form 6251) to see whether you owe AMT. If the tax amount is higher than the ordinary income tax, you need to pay AMT. Your company does not send you a W-2 for this spread amount when you hold the ISO stock, so remember to do this.

Alert: ISO exercises in a given tax year are reported on IRS Form 3921 early in the following year. The form helps you collect information for reporting sales of ISO shares on your tax return. It also helps in the AMT calculation at exercise. The IRS receives a copy of the form, ensuring that it knows about your ISO exercise and therefore any AMT triggered by the exercise income.

5. Failure To Use AMT Credits

When you have paid AMT because of your ISO exercise and hold, you get a tax credit. You do not need to sell the stock to start using the AMT credit. In addition, every year until the credit is used up, you do need to complete IRS Form 8801 to calculate it. Once you have sold the stock, avoid paying or calculating more AMT than is required for your ISO stock sale by reporting (as a negative amount) your "adjusted gain or loss" on Part I of IRS Form 6251.

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myStockOptions 2020 Conference

Registration is now open for the 2020 myStockOptions conference: Financial Planning For Public Company Executives & Key Employees, scheduled to take place on June 15 and 16 at the Hilton San Francisco Airport Bayfront. While postponement of this conference is likely because of COVID-19 response measures, no decision has yet been made about postponement dates or details.

The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with our Stock Compensation Bootcamp For Financial Advisors. A full day of conference sessions with expert speakers will follow on June 16. The agenda, speakers, and other details are available at the conference website.

Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces!

Avoid Costly Tax-Return Mistakes: Understand Changes In IRS Forms And Reporting

The high tax-return season is upon us, and this one is a doozy. Tax reporting for stock compensation is complex to begin with. On top of that, IRS tax forms and reporting have changed yet again for the 2020 tax season (for 2019 tax returns), adding yet more confusion to an already complicated process.

As we all know, tax mistakes can be very painful. With these and the multitude of other tax changes in recent years, the 2020 tax season presents more potential than ever for confusion and expensive mistakes in IRS filings for the millions of people in the United States who received income in 2019 from employee stock compensation and sales of company shares.

myStockOptions.com explains the tax-return forms and reporting you need to know in its fully updated Tax Center. This clear and reliable information includes easy-to-understand guidance and annotated tax forms. The website's goal is to help you and your financial or tax advisors realize the full potential of equity compensation. The last thing you want is to pay too much tax or incur IRS penalties that take yet more money out of your pocket.

This blog commentary gives a helpful overview of the tax-return content on myStockOptions.com to help you during tax season 2020.

What Taxpayers Need To Know About The Changes In Tax Forms And Reporting

The IRS Form 1040 tax return, condensed in 2018, has been revised again for the 2019 tax year. The numbered schedules (supplementary forms) of Form 1040 have been reduced to three (Schedules 1, 2, 3). On the IRS Form 1040, total capital gain or loss on Schedule D is once again entered directly on IRS Form 1040, not on Schedule 1 as it was last year. The AMT calculation total on Form 6251 is entered on a different line of Schedule 2.

An article and an FAQ at myStockOptions.com explain everything that taxpayers with stock comp must know about the changes in tax forms and reporting:

• Article: Tax Season 2020: What You Need To Know About New Reporting Rules

• FAQ: What's new for the 2020 tax-return season?

the myStockOptions Tax Center has all the answers on the filing and reporting of tax returns that involve stock options, restricted stock, restricted stock units, performance shares, stock appreciation rights, and employee stock purchase plans.

• Core articles and FAQs spell out the most common mistakes people make with stock grants on their tax returns. Taxpayers, their financial advisors, and their accountants can quickly run through these to be sure they submit error-free returns.

• The reporting of stock sales is made clear by special FAQs with annotated how-to diagrams of IRS tax-return forms.

• Diagrams of Form W-2, Form 3922 (for employee stock purchase plans), and Form 3921 (for incentive stock options) show how companies report equity compensation income to employees.

• Animated videos include a succinct tutorial on key IRS tax forms related to stock-sale reporting and a video guide to avoiding costly mistakes that can lead to the overpayment of taxes.

• Engaging podcasts convey tips for tax returns.

• A fun interactive quiz on tax-return topics lets users test their reporting knowledge in a painless way, before they file their returns, and links to related content from the answer key.

• A separate website on nonqualified deferred compensation at taxes: myNQDC.com

Confusing Rules For Reporting Stock Sales

By mid-February, each brokerage firm sends IRS Form 1099-B, or the firm's equivalent substitute statement, to clients who sold shares during the tax year. The information on Form 1099-B is also reported to the IRS. A diverse set of content at myStockOptions.com relates the background issues, explains how to understand Form 1099-B after selling shares from stock compensation or an ESPP, and shows how to avoid mistakes with the cost basis that can lead to the overpayment of taxes:

• Article: How To Avoid Paying Too Much Tax: Understanding Form 1099-B And Form 8949 For Reporting Stock Sales On Your Tax Return

• FAQ: How have IRS Form 1099-B and cost-basis reporting changed for sales of stock acquired from my stock options, restricted stock, or ESPP? What do I need to do differently because of the changes?

• FAQ: What if the wrong cost basis is reported on my 1099-B? How do I report the right cost basis on Form 8949 of my tax return?

• Video: Tax-Return Reporting Of Company Stock Sales: How To Avoid Overpaying Taxes

• Video: Tax Return Forms & Reporting Rules For Stock Sales

Form 1099-B is essential for completing IRS Form 8949 and Schedule D. Taxpayers who sold shares during the tax year must submit those forms with their IRS Form 1040 tax returns. Form 8949 is where taxpayers list the details of each stock sale, using the information on Form 1099-B. Schedule D aggregates the column totals from Form 8949 to report total long-term and short-term capital gains and losses. The total from Schedule D is entered on the Form 1040 return.

However, the cost-basis information in Box 1e of Form 1099-B may be too low, or the box may be blank. This is because the rules for cost-basis reporting are somewhat counterintuitive. Also, no basis is reported for restricted stock or restricted stock units.

Sound confusing? It is.

In the myStockOptions Tax Center, the special section Reporting Stock Sales presents FAQs with clearly annotated diagrams of Form 8949 and Schedule D. Each FAQ explains and illustrates a different reporting situation involving stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, or stock appreciation rights. Clear instructions and diagrams show how to complete the forms, whether the cost-basis information in Box 1e of Form 1099-B is accurate, too low, or omitted.

Demystifying IRS Forms 3922 And 3921

Elsewhere on myStockOptions.com, a pair of articles explains IRS Form 3922 for employee stock purchase plans and IRS Form 3921 for incentive stock options. With annotated examples of the forms that translate IRS jargon into understandable language, these articles, along with detailed FAQs (for both ESPPs and ISOs), clarify what taxpayers need to understand about the information provided by the forms, which can help them better understand the complexities of ESPP or ISO taxation. The forms can help with tax-return reporting. They also give the IRS tools for catching errors on the tax returns of people who sold ESPP or ISO stock.

Corporate Licensing Available

For companies, education is vital for ensuring that stock compensation motivates and retains highly valued employees and executives. The expert yet reader-friendly content at myStockOptions.com is ideally suited for licensing by companies and stock plan providers for their stock plan participants. A customized version of the website's award-winning content can be seamlessly woven into companies' HR, benefits, and/or compensation portals. Accessible through any internet browser, 24 hours a day, 7 days a week, licensed content from myStockOptions.com lets stock plan participants answer their own questions about their stock grants whenever they need to learn more—saving time for the stock plan staff and costs for the company. Contact us for more information ([email protected] or 617-734-1979).

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myStockOptions 2020 Conference: Register Now!

Registration is now open for the 2020 myStockOptions conference: Financial Planning For Public Company Executives & Key Employees, taking place on June 15 and 16 at the Hilton San Francisco Airport Bayfront. The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with our Stock Compensation Bootcamp For Financial Advisors. A full day of conference sessions with expert speakers will follow on June 16. The agenda, speakers, and other details are available at the conference website.

Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces!

Tax Season 2020: What You Need To Know About Changes In Reporting Rules For Capital Gains, AMT, And Equity Comp

"Wait, what?" It seems that every tax-return season lately the IRS has decided to change things up for us all. Last year it chopped the Form 1040 tax return from 73 lines to just 23 and introduced several new supplemental schedules that funnel information to Form 1040. While this year the IRS modifications are less drastic, there are key differences, especially in the way capital gains are reported.

Below we explain key tax-return points for executives and employees who have income from stock compensation—such as stock options, restricted stock units, or an employee stock purchase plan (ESPP)—or who have gains from sales of company stock. More reporting details are available in the Tax Center at myStockOptions. Remember to file by April 15, 2020.

General Changes

• The numbered schedules (supplementary forms) of Form 1040 have been reduced from six to three (Schedules 1, 2, 3).
• A new tax return, IRS Form 1040-SR ("US Tax Return For Seniors"), is available for taxpayers born before January 2, 1955. It has a large, easy-to-read font and includes a standard-deduction chart so that these taxpayers don't need to access the instructions, though Schedule A is still available for itemizing deductions.
• The Tax Cuts & Jobs Act, the major tax legislation that took effect in 2018, continues to affect tax rates and rules, including itemized deduction limits. However, for anyone paying the kiddie tax, the SECURE Act (passed at year-end 2019) changed the tax rates that apply for a child’s unearned income over $2,200.

Reporting Compensation Income On Your Tax Return

The 2019 IRS Form 1040 has 24 lines. Stock compensation, such as from the exercise of nonqualified stock options (NQSO) or the vesting of restricted stock units, along with salary income and cash bonuses, is entered on Line 1 of Form 1040.

Your W-2 With Stock Comp Income

Employee compensation income from all sources is aggregated in Box 1 of your W-2. If it’s uncertain what portions of your W-2 income come from stock comp, your company may voluntary specify that in Box 14; for nonqualified stock options and nonqualified ESPPs, your company is required to do so in Box 12. This compensation income will also appear in Box 5 for Medicare Wages, and in Box 3 for Social Security Wages up to the yearly maximum ($132,900 in 2019; this maximum was raised to $137,700 for 2020).

Income Omitted From Form W-2

In certain circumstances, you may need to use Schedule 1 to report any employee stock compensation income not reported on Form W-2. You use Schedule 1 only as a last resort in the following situation: your company mistakenly omits the income from your W-2, you cannot get a corrected Form W-2c, and you don't file Form 4852 as a substitute for Form W-2. If that is the case, you report the income as "Other income" on Line 8 of Schedule 1. (This reporting changed from Line 21 for 2018 returns to Line 8 for 2019 returns.)

Capital Gain Or Loss

If you sold shares during the 2019 tax year, you enter each sale on Form 8949 and report the total capital gain or loss on Schedule D. That total on Schedule D is directly reported on Line 6 of Form 1040. This is different from last year's reporting, in which the total capital gain or loss was entered on Schedule 1 rather than on Form 1040.

IRS Restoration Of Capital Gains To The Body Of Form 1040

Putting capital gains reporting back on Form 1040 was a wise move by the IRS. 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 for tax year 2018 was reported on the newly created Schedule 1, with totals from that schedule going onto the revised Form 1040. Now, in the Form 1040 for tax year 2019, total capital gains (or losses) are back on the body of the form (Line 6) and not the schedule.

Last year's experiment with capital gains reporting was unpopular. The IRS was criticized for the confusion it caused. 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.

The change in the Form 1040 reporting was both innovative and disruptive. The IRS listened to feedback after the initial "product" failed to gain favor with users. It carefully weighed public comments, including those submitted by this blogger. The IRS 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 all your sources of income) more confusing for taxpayers, tax preparers, and financial advisors. While it is easy to criticize the IRS, as completing tax returns is complex and not enjoyable, at least the IRS learned and moved on from that experiment in an almost entrepreneurial way.

Alternative Minimum Tax (AMT)

A concern for anyone with incentive stock options (ISOs), the alternative minimum tax (AMT) is no longer directly reported on Form 1040 from the calculation on Form 6251. Instead, AMT from the Form 6251 calculation now goes into Line 1 of Schedule 2 ("Tax"). This is a change from last year's reporting on Schedule 2 (which was on Line 45). Attach Form 6251 to Schedule 2.

Other aspects of reporting when you have an ISO exercise that triggers AMT and when you later sell the ISO stock:

• The totals from Part I of Schedule 2 go into the Line 12b totals of Form 1040 (previously Line 11).
• Form 6251 has not changed since last year, when its lines were revised. The spread at ISO exercise for the AMT calculation is reported on Line 2i. When the ISO stock that triggered the AMT is sold, the difference from the ordinary tax is reported on Line 2k.
• 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 6 (check box b). The totals from Part I of Schedule 3 go into Line 13b of Form 1040.

Rules For Cost-Basis Reporting Of 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 on Form W-2) in the cost basis reported on Form 1099-B. This creates tax return complications and the risk of overpaying taxes, as only the exercise cost appears on the 1099-B. 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.

Additional Tax-Reporting Resources

For guidance on the tax-return reporting for stock compensation and sales of company shares, including annotated diagrams of Form W-2, Form 8949, Schedule D, Form 3921, and Form 3922, see the Tax Center on myStockOptions.com.

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myStockOptions 2020 Advisor Conference: Save The Date!

The 2020 myStockOptions conference, Financial Planning for Public Company Executives & Key Employees, will be held on June 15 and 16 at the Hilton San Francisco Airport Bayfront. The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with an advisor boot camp on equity comp. A full day of conference sessions with expert speakers will follow on June 16. Registration is expected to open later this month.

Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces! Please contact us ([email protected]) to be notified when registration starts at the early-bird discount rate.

The Top 3 Tax Numbers In 2020 That Employees With Equity Comp Should Know

Tax-return season looms, meaning you will soon have to focus on reporting your 2019 income, including compensation from stock plans or gains from stock sales. However, before that, remember your basic tax planning for 2020.

At the start of each year, many key numbers in tax-law provisions are adjusted for inflation. It can be hard to spot those that matter to you. Below are the top three sets of tax figures that highly compensated employees should know: the Social Security income ceiling, your marginal tax rate, and how much you can put into your 401(k) plan.

1. Social Security Wage Base

Social Security tax (6.2%) applies to wages up to a maximum amount per year set annually by the Social Security Administration. Income above that threshold is not subject to Social Security tax (by contrast, Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level). In 2020, the Social Security wage cap is $137,700, up slightly from $132,900 in 2019. This means the maximum possible Social Security withholding in 2020 is $8,537.40. Once your income is over that amount, you'll see 6.2% more in your paycheck or in the income you get from stock compensation, such as an NQSO exercise or RSU vesting.

2. Income-Tax Brackets And Withholding

The table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate (i.e. the percent of tax you pay for an additional dollar of income in your current tax bracket). This number tells you whether the taxes withheld according to your information on the newly revised Form W-4 will cover the total tax you will owe for 2020. To avoid "penalizing" additional income in your mind, be sure you know your effective or average tax rate.

RATE	TAXABLE INCOME (SINGLE)	TAXABLE INCOME (JOINT)
10%	$0 to $9,875	$0 to $19,750
12%	$9,876 to $40,125	$19,751 to $80,250
22%	$40,126 to $85,525	$80,251 to $171,050
24%	$85,526 to $163,300	$171,051 to $326,600
32%	$163,301 to $207,350	$326,601 to $414,700
35%	$207,351 to $518,400	$414,701 to $622,050
37%	$518,401 or more	$622,051 or more

Need To Pay Estimated Taxes?

Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate. Instead, they apply the IRS flat rate of 22% for supplemental income (the rate is 37% for yearly supplemental income in excess of $1 million).

As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% may not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the tax return you file in 2021, pay estimated taxes during 2020, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall.

3. Qualified Retirement Plans

In 2020, you can elect to defer up to $19,500 from your pay into qualified retirement plans, such as your 401(k). This is a $500 increase over the 2019 limit.

The total ceiling for deferrals to defined contribution retirement plans (including any additional part contributed from your employer) rose to $57,000 in 2020, a $1,000 increase. Both of these limits are $6,500 higher if you are 50 or older. The amount of compensation income that can be considered in the calculation for qualified deferrals is $285,000 in 2020. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.

Want to Defer More Income?

Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan or other name. For more on these plans, see our sibling website myNQDC.com.

IRS Resources

Here are resources with more details on the many adjusted 2020 tax numbers:

• IRS Rev. Proc. 2019-44 gives inflation adjustments in various income-tax-related provisions.
• IRS Notice 2019-59 and an IRS table give the annual adjustments related to various tax-qualified retirement plans.

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myStockOptions 2020 Advisor Conference: Save The Date!

The 2020 myStockOptions conference, Financial Planning for Public Company Executives & Key Employees, will be held on June 15 and 16 at the Hilton San Francisco Airport Bayfront. The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with an advisor boot camp on equity comp. A full day of conference sessions with expert speakers will follow on June 16.

Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces! Please contact us ([email protected]) to be notified when registration starts at the early-bird discount rate.

IRS Makes Smart Moves On Estimated Taxes And Tax-Return Reporting For Capital Gains

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.

Tax-Return Fun And Error Prevention: Videos, Podcasts, And Interactive Quiz

Reporting stock sales on your tax return has not gotten any easier (or more exciting) this year. However, if there's a way to make learning about tax reporting fun, we'll try it.

In the Tax Center at myStockOptions.com, two animated videos give practical guidance about the reporting of company stock sales on tax returns in an engaging style. The covered topics include IRS Form 1099-B and the cost basis of shares acquired from equity comp, along with the reporting on IRS Form 8949 and Schedule D. These videos offer a quick way to learn the basics of these important points and prevent expensive mistakes on tax returns.

The first of these two videos is Tax-Return Reporting Of Company Stock Sales: How To Avoid Overpaying Taxes (runtime 8:05). In this video, the tax experts at myStockOptions.com explain:

• the rules for reporting stock sales on your tax return
• major errors to avoid if the shares you sold came from stock options, restricted stock/RSUs, stock appreciation rights, or an employee stock purchase plan
• the "cost basis" of shares acquired from equity compensation
• why it is crucial to understand your cost basis to avoid overpaying your taxes

The video also covers recent modifications of IRS rules, how these changes restricted what brokers can report on Form 1099-B for stock sales, and the related adjustments you must make on your tax return. Included are examples and annotated versions of key IRS forms to show the correct way to report your taxes and prevent costly mistakes. The video ends with key takeaways to remember so that you do not overpay taxes and attract unwanted IRS attention.

In our other tax video, Tax-Return Forms And Reporting Rules For Stock Sales (runtime: 8:08) you will learn about:

• the reporting on Form 1099-B, and why the reported cost basis may be wrong or omitted
• how to figure out the right cost basis for your stock sales
• Form 8949 and how to report stock sales on it
• how to interpret Form 1099-B when completing Form 8949
• what to do when the cost basis in Box 3 of Form 1099-B is too low or not given
• totaling the reported stock sales on Schedule D

Please try our videos! They're informative, and each is just eight minutes long. After you've watched them, test your smarts with our interactive quiz on tax returns.

Like all the content at myStockOptions.com, these videos can be licensed and customized to fit company stock plans. We also have podcasts with audio presentations on tax-return topics. Our video and podcasts complement the helpfully annotated diagrams of Form 8949 and Schedule D that appear in special FAQs in our Tax Center.

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Register For Our National Financial-Planning Conference

We are preparing for our annual national conference, Financial Planning For Public Company Executives & Directors.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm

In one action-packed day, attendees will hear from leading experts on many topics:

• Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
• Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
• Financial planning for equity comp in pre-IPO companies
• Strategies for concentrated stock positions and for nonqualified deferred compensation
• Rule 10b5-1 trading plans
• Grant, employment, and severance agreements
• Case studies and other examples of successful planning strategies
• Methods for attracting and effectively advising high-net-worth clients
• And much more!

CE credits for CFPs, CEPs, and other professionals will be available. Registration and hotel reservations are available now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, [email protected]).

Overpaying Taxes On Stock Sales: An Easy Mistake To Make And How You Can Avoid It

Getting ready to handle your federal tax return? If you sold shares acquired from equity compensation last year, you need to understand the right cost basis of your stock before you start. Unfortunately, IRS rules can lead to a mistake in cost-basis reporting on your return that causes you to overpay taxes. This commentary explains why and shows how you can avoid this potentially expensive mistake.

Cost-Basis Basics

The cost basis is one of the trickiest areas in correctly reporting stock sales on your tax return. It is the number you subtract from your proceeds to determine the size of your capital gain or loss. If the cost basis you report is too low, then you will overpay taxes. The cost basis is especially tricky to understand when you sold stock you acquired from employee stock compensation, such as stock options, restricted stock units, or an employee stock purchase plan.

Reported to you by your broker on IRS Form 1099-B or its equivalent substitute statement, the cost basis includes the price paid to acquire the shares and the compensation recognized for acquiring them (reported on Form W-2). After you sell shares that were acquired through stock compensation, you, your accountant, and your financial advisor need to understand the IRS rules that require brokers in many situations to underreport the basis by leaving out the compensation income. Otherwise these IRS rules could lead you to make a mistake with the cost-basis reporting on your tax return, causing you to overpay taxes.

When you report a sale of shares on your tax return, you must complete IRS Form 8949 if the cost basis needs an adjustment, along with Schedule D. You submit both with your Form 1040 tax return. Form 8949 is where you list the details of each stock sale, using the information on Form 1099-B. Schedule D aggregates the column totals from Form 8949 to report your overall long-term and short-term capital gains and losses. Starting this tax season, the total from Schedule D is entered on Schedule 1—not directly onto Form 1040 (see our blog commentary at Forbes.com on the new IRS tax-return forms and rules).

However, the cost-basis information sent to the IRS and you on the Form 1099-B may be wrong (too low), or the box may simply be blank.

Cost-Basis Confusion

Depending on your situation, the reported cost basis on Form 1099-B from your broker may put you at risk for overpaying taxes for several reasons:

• The rules for cost-basis reporting on Form 1099-B are mandatory only for stock acquired in 2011 and later, so the basis of stock and other securities acquired earlier may not appear at all.
• Starting in 2011, brokers had the flexibility to include the compensation part of the basis in their reporting to the IRS. However, the rules changed. The final IRS regulations (pages 29–30) on this topic prohibit brokers from reporting the compensation portion for stock grants made on or after January 1, 2014.
• Therefore, for sales of company stock acquired from most grants of equity compensation and ESPPs, brokers will report to the IRS and you the unadjusted partial basis for all grants.
• No basis is reported for restricted stock and RSUs, as they are not acquired for cash and are considered noncovered securities.

Example: You exercised nonqualified stock options at $10 when the market price was $25, and you sold all the shares at exercise. Your Form W-2 shows $15 per share of compensation income, which together with your purchase/exercise price of $10 gives you a cost basis of $25 per share. However, Form 1099-B reports a cost basis of only $10. If you use just that $10 without any modifications on your tax return, you will pay tax twice on the $15 (i.e. both as compensation and as capital gains income).

Tax-Return Actions To Take When The Cost Basis Is Omitted, Too Low, Or $0

Understand that your broker has not made a mistake in what it has reported to you and the IRS, as it is simply following the IRS rules. We at myStockOptions recommend certain steps for the 2019 tax season to avoid overpaying taxes if an incomplete cost basis was reported to the IRS on Form 1099-B.

First, you enter the Form 1099-B cost basis in column (e) of Form 8949:

Then you take the following steps.

1. Identify the type of capital gain or loss. Start with Part I on Form 8949 for short-term capital gains/losses or Part II for long-term capital gains/losses. Box 2 on Form 1099-B (or on the substitute statement from your broker) will indicate which type you have (long or short).

2. Adjust the gain or loss. Find column (g), "Amount of adjustment." On Form 8949, enter in this column the amount of stock compensation that was not included in the cost basis (Box 1e) reported to the IRS on Form 1099-B. This part of your W-2 income will be a negative number (in parentheses), as the incorrectly low basis reported on Form 1099-B will have made your gain too large (or your loss to small).

3. Explain the reason for the adjustment. In addition, column (f) on Form 8949 has the title "Code(s) from instructions." This column is used to explain, with a special code, why there is an adjustment in column (g). For understatements in the cost basis, which can happen with stock compensation, you insert Code B in column (f). This indicates that the basis on Form 1099-B is incorrect and should be higher than what is shown.

4. What to do if no cost basis is shown. If no cost basis or 0 appears in Box 1e of Form 1099-B (or if the basis appears in your 1099-B but not in what the broker sent to the IRS), you enter the correct basis in column (e) of Form 8949 instead of leaving it blank. You do not make any adjustment in column (g) or add a code in column (f). This is likely to happen with stock acquired before 2011 and with noncovered securities, such as restricted stock or RSUs, and perhaps stock appreciation rights (SARs).

Additional Resources To Help You Avoid Overpaying Taxes

It is up to you—not your company, your broker, or the IRS—to make any necessary modifications in your Form 8949. For further details on these steps, see the FAQ, short video, and podcast on this topic at myStockOptions.com. For annotated diagrams showing how to report stock sales from all types of stock compensation, including stock options, restricted stock units, and ESPPs, see the section Reporting Company Stock Sales in the website’s Tax Center.

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Register For Our National Financial-Planning Conference

We are preparing for our annual national conference, Financial Planning For Public Company Executives & Directors.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm

In one action-packed day, attendees will hear from leading experts on many topics:

• Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
• Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
• Financial planning for equity comp in pre-IPO companies
• Strategies for concentrated stock positions and for nonqualified deferred compensation
• Rule 10b5-1 trading plans
• Grant, employment, and severance agreements
• Case studies and other examples of successful planning strategies
• Methods for attracting and effectively advising high-net-worth clients
• And much more!

CE credits for CFPs, CEPs, and other professionals will be available. Registration and hotel reservations are available now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, [email protected]).

It's Complicated: Beware These Tax-Return Errors With Restricted Stock And RSUs

There's no denying it: stock compensation makes tax returns complicated, whether you had income last year from stock options, restricted stock or RSUs, an employee stock purchase plan (ESPP), or sales of company stock. Special reporting issues arise with restricted stock and restricted stock units (RSUs), and these can cause headaches even for CPAs and financial advisors.

It's important to report your stock compensation right on your federal tax return. Mistakes can lead to overpayment of taxes or unwanted attention from IRS auditors. Below are five reporting mistakes to avoid when you have compensation income from restricted stock/RSUs or sell shares acquired from these grants.

1. Not reporting income until the full grant vests. For restricted stock that vests over a number of years (e.g. 25% per year), you recognize and report income with each vesting slice, not in the year of grant or when the full grant is vested. One exception: If you made a Section 83(b) election (unavailable for RSUs), you elected to pay taxes on the full value of the restricted stock at grant and do not then report income again for the value of the shares at vesting.

2. Double-reporting income on Form 1040. You will mistakenly double-report income if you do not realize that your income in Box 1 of Form W-2 already includes stock compensation income (reported on Line 1 of Form 1040). Wrongly thinking that it was left off the W-2, or that the income your company voluntarily listed in Box 14 is separately reported on your tax return, may prompt you to erroneously report the income in the line for "Other income" (Line 21 on Schedule 1 of the revised Form 1040).

Alert: Doing this will cause the income to be taxed twice as ordinary income. You use Line 21 only when your company mistakenly omits the income received at vesting from your W-2.

3. Not reporting the stock sale. After selling the shares at vesting, since you have no additional proceeds from the grant beyond the income that’s reported on your W-2, you may erroneously believe you do not also need to report the stock sale. However, you still need to report this security sale on Form 8949 and Schedule D even though you are also including the income as part of your compensation income. For an annotated example of how to report the restricted stock sale on these tax forms, see the related FAQ at myStockOptions.com, an online resource devoted to all types of equity compensation.

Alert: If the IRS receives 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 will conclude that you failed to report the gain on the sale. IRS computers are efficient at matching information on related tax forms. Using a tax basis of $0, the IRS computers will then automatically send you a notice (CP-2000) for the taxes due on the full amount of your sale proceeds.

4. Using too low a cost basis for the capital gains calculation. Even though you do not purchase stock acquired from restricted stock/RSUs, your tax basis for reporting the stock sale on Form 8949 is the amount of compensation income recognized at vesting that appeared on your Form W-2. If you made a Section 83(b) election, the basis amount is the value at grant on your Form W-2. For the cost basis, Box 1e of your Form 1099-B may be blank (or show $0) only because brokers are not allowed to report the cost basis for securities where no money is paid for them (technically called noncovered securities, e.g. restricted stock and RSUs).

Alert: Merely using what’s on the 1099-B, without this adjustment on Form 8949 to report the sale, will cause you to pay tax twice on the value of the shares at vesting.

5. Miscalculating the number of shares surrendered or sold for taxes. If you sold only some of the shares to pay the withholding taxes, you don't want to report on your Form 8949 the cost basis for all the shares vested. That would result in a much larger tax basis and a capital loss for those shares sold. For a share surrender in which you receive only the net after-tax shares in your account, speak with your tax advisor about the need to report this type of withholding on Form 8949, as no stock sale occurred.

Alert: When you later sell the remaining shares in your grant, remember to exclude at that time from your reporting on Form 8949 the shares used earlier to fund the taxes (i.e. do not use the full number of vested shares). Otherwise you'll report a cost basis for more shares than you sold.

Tax-Season Resource

For more guidance on tax returns that involve stock compensation, including our popular annotated diagrams of Form 8949 and Schedule D, see the Tax Center at myStockOptions.com.

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Register For Our National Financial-Planning Conference

We are preparing for our annual national conference, Financial Planning For Public Company Executives & Directors.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm

In one action-packed day, attendees will hear from leading experts on many topics:

• Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
• Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
• Financial planning for equity comp in pre-IPO companies
• Strategies for concentrated stock positions and for nonqualified deferred compensation
• Rule 10b5-1 trading plans
• Grant, employment, and severance agreements
• Case studies and other examples of successful planning strategies
• Methods for attracting and effectively advising high-net-worth clients
• And much more!

CE credits for CFPs, CEPs, and other professionals will be available. Registration and hotel reservations are available now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, [email protected]).