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.

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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.

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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

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

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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.

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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”).

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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.


myStockOptions On-Demand Webinar Provides Expert Insights And Case Studies

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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

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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

Financial literacy

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

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

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-2Form 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

Asdfawe

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 & Nonqualified Deferred Comp: Issues To Be Aware Of

Focus on tax returns.Below is a quick take on things you need to be aware of in 2023 when your tax return involves nonqualified deferred compensation (NQDC) distributed to you in 2022. It's extracted from the comprehensive resources on nonqualified deferred comp at our sibling website myNQDC.com.

Did you also have income in 2022 from equity compensation or sell shares acquired from equity comp? See the Tax Center at myStockOptions for resources and guidance on tax returns involving equity comp and sales of company shares.

Changes In Reporting On IRS Form 1040

The IRS Form 1040 tax return has been revised for the 2023 tax season (reporting income received in 2022). Distributions from NQDC plans, as well as salary income, are now reported as part of income on Line 1a of Form 1040. (See also the article on tax-return changes at myStockOptions for more details on changes in Form 1040 reporting.)

W-2 Reporting Still Potentially Unclear

The IRS has still not finalized the Section 409A rules on W-2 reporting. Therefore, your company does not need to indicate deferred income from an NQDC plan on your Form W-2, though it may do so voluntarily in Box 14. (Once the IRS has finalized the 409A rules on W-2 reporting, income deferred during the year will have to be indicated with Code Y in Box 12.) Distributions from plans usually appear in the W-2 boxes used for wages and other compensation, along with Box 11 for nonqualified plans (see an FAQ on this topic at myNQDC).

What To Do If Your Company’s NQDC Plan Violates Section 409A

If your plan violates Section 409A and you need to pay a penalty and interest, you report that on Schedule 2 of your IRS Form 1040 tax return: Line 17h, “Income you received from a nonqualified deferred compensation plan that fails to meet the requirements of section 409A.”

Form Schedule 2.

The total on Schedule 2 is then entered on Line 23 (“Other taxes”) of Form 1040.

Depending on your employment status, the income that is subject to this additional tax will appear on Form W-2 or on the revised Form 1099-MISC and new Form 1099-NEC.

Alternative Minimum Tax

Consider the alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate. Nonqualified deferred compensation itself is not an AMT preference item. However, income deferrals or distributions can serve to prevent you from triggering the AMT in a tax year or can cause to you trigger it, depending on your other income. While the 2018 tax changes reduced the likelihood of triggering the AMT by raising the exemption amounts and phaseout thresholds, you still need to calculate it (see an FAQ on this topic myStockOptions).

Need An Extension?

If you need to file an extension of your tax-return deadline because of nonqualified deferred compensation, see the FAQ at myNQDC on mistakes to avoid with extensions. Note that the IRS routinely postpones the filing due date for taxpayers in areas affected by natural disasters. You can find out whether you qualify for a postponement in the IRS website section Tax Relief In Disaster Situations. For most taxpayers in California, the due date for 2022 tax returns (April 18, 2023) has been extended to October 16.


Like what you see at myNQDC? Full access to myNQDC is available through individual subscriptions to premium membership or through corporate licensing. Premium access includes the Learning Center, which offers up to 6 continuing education credits for CFPs, 6 PACE credit hours for CLU® and ChFC® professionals, and 12 CPE hours for ASPPA members.

To learn about our corporate services, see the About Us and Licensing sections of myNQDC. Please contact us (617-734-1979, [email protected]) to obtain more information about licensing content for your website, print materials, and/or newsletters, and for premium memberships at special bulk rates for your staff.


Tax-seasonThe popular myStockOptions tax-season webinar is available on demand: Preventing Tax-Return Mistakes With Stock Comp & Stock Sales. It features a panel of tax experts discussing how to prevent errors in tax returns that involve equity comp and company shares. Their presentations include real-world case studies showing how to use information in tax returns to create better financial plans.

  • 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

The webinar recording offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP/ECA. A detailed agenda is available at the webinar registration page.


Two Special Tax-Return-Reporting Issues In 2023: Volatile Stock Prices And Employee Mobility

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Over a decade passed between the Great Recession of 2008–2009 and the volatile market downturn of 2022. As a result, many younger employees with equity compensation—whether stock options, restricted stock units, employee stock purchase plans, and/or and company shares—are new to the impacts of fallen stock prices and capital losses in their tax-return reporting. For some, the 2023 filing season will be the first time they hear the terms "tax-loss harvesting" and "wash sales."

Another widespread issue for tax reporting that is new to many employees involves interstate employee mobility and the allocation of income between states. That is, of course, on the rise as more employees than ever work remotely in a different state from their employer, whether in one place or as “digital nomads” moving from state to state.

In a recent myStockOptions webinar on tax returns that I moderated (Preventing Tax-Return Mistakes With Stock Comp & Stock Sales), three leading financial and tax advisors with expertise in equity comp presented ideas and tips for preventing costly tax-return errors in 2023. This article summarizes some of the key points they made about capital losses, wash sales, and employee-mobility issues.

Down And Volatile Stock Prices? Consider Tax-Loss Harvesting...

Amid the down and volatile stock markets of 2022, many employees with stock comp have capital losses from selling company stock whose value fell after vesting, exercise, or purchase. On your tax return, you can apply your capital losses to offset your capital gains, thus reducing your taxable capital gains income. After that, you can also net up to $3,000 (for joint filers) of capital losses against ordinary income (e.g. your salary, income from RSU vesting, income from NQSO exercise). Any usused capital losses are carried forward. This is called tax-loss harvesting.

Webinar panelist Stephanie Bucko, a CPA and the co-founder of Mana Financial Life Design in Los Angeles, routinely uses this strategy to help reduce her clients’ taxable income on tax returns. “It definitely impacts the strategy. You can cut out a ton of taxes if you’re able to offset gains with losses.” She uses software to capture her clients’ full financial picture and also talks through their history to identify any capital losses that may be available to net against gains.

“It is likely for tax year 2022 that clients will have capital losses on their tax return,” Stephanie concluded. She pointed out that selling loss-makers can be useful not only to harvest the loss but also to diversify out of a concentrated stock position. “This presents an opportunity for clients with concentrated positions to reduce risk without suffering tax consequences. Our recommendation is to review Schedule D for these tax losses.”

Tax-loss harvesting is also pursued by webinar panelist Daniel Zajac, a CFP, Enrolled Agent, and managing partner of Zajac Group (Exton, PA). He noted that the volatile and declining stock prices of 2022 presented opportunities to take advantage of capital losses not only to offset any capital gains in 2022 but also to carry remaining losses forward to future tax years.

“In a year like last year,” Daniel went on, “I think that a lot of advisors were talking to clients about capturing some losses and carrying them forward. For many advisors that’s part of the process at year-end, and it’s funneled through to the tax preparer to be sure it gets accounted for.”

...But Watch Out For Wash Sales

Be aware that there are limits on tax-loss harvesting for those who try to be too clever with it. If you sold loss-generating stock before the end of 2022 for tax-loss harvesting and then repurchased the same stock in January to keep your investment in it, you will run into the “wash sale” rule. This is triggered by a sale of stock at a loss coupled with the repurchase of the same stock within 30 calendar days before or after the sale.

The result? Your capital loss is disallowed on your tax return for that year, with the basis and holding period added to the replacement shares that you purchase.

Most experts believe that option exercises, RSU vestings, and ESPP purchases are “buys” of company stock for tax purposes. You want to watch out for monthly RSU vestings, as these will trigger a wash sale if you have also sold company stock at a loss within 30 days before or after.

Your brokerage firm will usually track and report wash sales by account. However, it may not do this across different accounts that you (and your spouse) have at the firm and at other brokers. Therefore, you and/or your tax-return preparer must consider trading activity in securities across all the accounts you have.

“The first thing I try to do is to educate my clients to avoid the issue,” chuckled webinar panelist Dan B. Hodgin, a CPA and the owner of Silicon Valley Tax Group (Campbell, CA). “But obviously that can’t always be accomplished.”

How should you track all of this? First, he said, you calculate the number of shares sold during the year. “Sometimes it looks as if clients have wash sales throughout the year, but by the end of the year they don’t. They’re all netted out. But if they do in fact have wash sales that are going to carry to a future year, you really just have to do a manual calculation. There’s really no other way.”

You report on Schedule D the wash-sale amount, which may differ from the amount on the Form 1099-B you receive from the broker, Dan explained.

“In a future year, when those shares are sold that have an adjusted basis, you’re going to adjust in the opposite direction. You want to be sure you have full backup for that. In the year when you report the wash sale, the IRS is not going to bother you or question you. They will just see less of a loss, and that’s the end of that. But in the year when you have a bigger loss than the one on the 1099-B for that year, because you are adjusting for those previous wash sales that have now been cleared out, that’s when the IRS is going to have questions.”

Dan observed that many taxpayers haven’t experienced the issue of wash sales amid the rising stock markets of the past 10 years or so. “But with down markets and 80,000 new IRS agents, I’m going to be very careful with wash sales,” he stated. “I’m going to get a full inventory of shares and track those wash sales and the basis outside the brokerage account. If they’re not tracking wash sales on RSUs or ESPPs, then you have to. It’s the only way.”

“What if wash-sale RSU shares were sold in the same calendar year?” asked a webinar attendee. “If you generate a wash sale in February or March and then sell all the shares you have by December, I’m not going to put it in,” replied Dan. “The two are just going to wash each other out. I’m going to report it only if it has a net effect on the tax return at the end of the year.”

For more details on wash sales, see another recent myStockOptions blog commentary: Selling Stock At Year-End To Harvest Losses? Don't Get Tangled In The 'Wash Sale' Rule.

Remote Work And Digital Nomads: Issues With Employee Mobility

Generally, each state you live in determines what income is taxable and when. Many companies report income to and withhold taxes for only the state where you live when restricted stock units (RSUs) vest or when you exercise nonqualified stock options (NQSOs).

However, other states where you lived during the vesting period may contact you later if its tax officials learn of this stock comp income. The state’s tax authorities may seek a proration of your compensation income for your former residence, basing their tax on the part of the vesting period during which you performed services in their state.

The general rule for sourcing and allocating stock comp income is the number of days worked in the state divided by (for RSUs) the number of days between the grant date and the vesting, or (for NQSOs) the number of days between the grant date and either the vesting or exercise date, depending on the state rules.

In the myStockOptions webinar, panelist Dan Hodgin gave some key guidance for mobile employees. “Get a travel history for the current year,” Dan recommended. “Establish a residency history for the duration of the vesting schedule.”

This is important, he explained, because you can’t necessarily trust your Form W-2 on income determination. “Payroll department staff are not tax experts,” he cautioned, “and the complexity of this issue has grown exponentially since remote working became more readily available.”

State reporting of state-sourced wages on Form W-2 can vary, he added. “New York, for example, requires state wages to equal federal wages. Sometimes the year-end paystub can provide a more accurate state breakdown.”

Once you have your records in place, compare your fact pattern to your W-2, Dan advised. “If the W-2 does not match the fact pattern, ask your company to amend it. If you can’t get the company to amend the W-2, adjust the information on the tax return. Make sure you can back up your allocation with a strong fact pattern.”

With that fact pattern documented, you will be ready for any notice from the “aggrieved” state. He also warned employees to “be wary of low- or no-tax states versus high-tax states.”

Additional Tax-Reporting Resources

The 100-minute webinar in which these tax experts spoke, Preventing Tax-Return Mistakes With Stock Comp & Stock Sales, is available on demand along with many other on-demand webinars at the myStockOptions Webinar Channel.

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 myStockOptions Tax Center.


Tax Season 2023: myStockOptions Resources And Special Webinar Offer Crucial Guidance

She has concernsTax Season 2023 is here. The tax reporting for equity comp income and stock sales in 2022 can be complex, given the year's stock-market volatility and declines. With that and the many tax-reporting changes of recent years, the 2023 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.

Fortunately, the award-winning resources of myStockOptions are here to lessen your stressin'. The fully updated myStockOptions Tax Center provides expert yet easily understandable guidance on the filing and reporting of tax returns that involve stock options, restricted stock, restricted stock units, performance shares, stock appreciation rights, employee stock purchase plans, and sales of company stock.

myStockOptions Tax Center: In-Depth Resources For Tax Season

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

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

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

Tax-seasonSpecial Webinar On Tax Returns & Error Prevention

On February 15, myStockOptions.com will hold a special webinar featuring a panel of tax experts who will provide insights on tax returns involving stock comp and present real-world case studies showing how to use information in tax returns to create better financial plans: Preventing Tax-Return Mistakes With Stock Comp & Stock Sales

  • February 15 (2pm–3:40pm ET, 11am–12:40pm PT)
  • 2 CE credits for CPE, EA 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

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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.

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  • 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.


WEBINAR: Stock Compensation Bootcamp For Financial Advisors

1622148591-18338669dfef1928March 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

tax return stress

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:

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

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

Tax-season-webinar

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

tax-return overload

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.

Form1040line7

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”).

8j

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.

8z5. 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.


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

Tax-seasonThis 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.


Tax Day 2021: 8 Key Things To Know About Tax-Return Extensions

tax return stress

Tax Day 2021 is May 17 (Monday). If you haven't yet filed your federal tax return, you need to decide whether to go for it now or get an extension.

Many situations can lead you to file an extension. For example, stock compensation incomee.g. from an NQSO exercise, an ISO or ESPP disqualifying disposition, or the vesting of restricted stockcan raise your income tax and make your return complex. You may just need a little extra time, especially with everything else going in the world right now. The good news is that, if you can't file by May 17, you can get an extension of your filing due date without any questions asked.

However, you must understand the rules. To avoid getting hit with IRS penalties, particularly if you don’t have the money to pay taxes owed with your 2020 Form 1040 tax return, below are 8 crucial things to know about filing an extension.

1. Extension Does Not Need IRS Approval

To gain an automatic extension for the due date of your tax return (to October 15), you can use IRS Form 4868Application For Automatic Extension Of Time To File. Alternatively, you can file for an extension through the IRS Free File system.

The IRS automatically processes a tax-return filing extension if you pay all or part of your taxes electronically by the deadline. You don't need to file a paper or electronic Form 4868 when making a payment with IRS Direct Pay, the Electronic Federal Tax Payment System, or with a debit or credit card. Simply select "extension" as the reason for the payment.

2. Extension Does Not Delay Taxes Owed Or IRA Deadline

The extension to October 15 applies only to the filing of your tax return. It does not delay any tax you may owe beyond what you already paid the IRS in withholding and/or estimated taxes. To avoid penalties, be sure to pay taxes you expect to owe by the May 17 IRS filing deadline. Note that the extension also does not delay the deadline for making 2020 contributions to IRAs and HSAs beyond May 17.

3.  File Your Tax Return Even If You Cannot Pay Taxes Owed

If you are ready to file, you may want to file your tax returns on May 17 even if you cannot pay taxes due right now. To avoid a late-filing penalty, file your return on time and pay as much as you can. The IRS will then send you a bill or notice for the remaining amount you owe, including any penalties and interest. If you can’t pay that now, see #4 below.

4.  You Can Work Out A Deal With The IRS

If you lack the money to pay your income tax, consider asking to pay by installments or working out with the IRS an online payment agreement, an offer in compromise, or a temporary delay in collection until your financial situation improves.

“It is an extension to file and NOT an extension to pay,” notes Beth Logan, EA, who works with Kozlog Tax Advisers and is a past president of the Massachusetts Society of Enrolled Agents. “If you’re filing an extension to avoid your tax bill, you are only hurting yourself.”

Logan recommends that you send the return and then contact the IRS or get a tax return professional (an Enrolled Agent and/or CPA) to contact the IRS for one of these payment methods. Many states, she explains, also offer a delay in paying for hardships, such as unemployment. A delay doesn’t make the taxes go away, but at least the tax authorities will leave you alone for a while (up to two years in Massachusetts).

“For most people, the interest rate on their credit cards far exceeds the interest rate charged by the IRS or the states,” Logan warns. “Therefore, you are usually better off on a payment plan than using a credit card for unpaid taxes.”

5. IRS Has Different Penalties For Failure To File And Failure To Pay

As outlined on its website, IRS has different penalties for failure to file your tax return and for nonpayment or underpayment of taxes owed. To avoid an underpayment penalty, when you file a tax-return extension you need to have paid at least 90% of the total actual income tax for the year of the return. This means that if you end up paying more than 10% of your total tax owed with your actual return after the deadline, interest and penalties will apply.

The penalty for failing to file is generally more costly than the penalty for failing to pay, explains Susan Allen of the AICPA. The penalty for missing the initial filing due date or the extended deadline is 5% of the balance due for each month, or part of a month, up to a maximum of 25%. The IRS does not assess penalties for both failure to file and failure to pay for the same period, she says.

6. Remember To File An Extension For Your State Tax Return

Don't forget about your state tax return. Most states also shifted their tax-return deadlines to May 17. For example, if you pay tax to the state of California and cannot file by the due date, you get a filing extension. As with your federal return, you will still need to pay a specified percentage (e.g. 90%) of any tax you owe by the filing deadline.

7. Extension Does Not Increase Risk Of IRS Audit

This is a myth, as explained in a quiz on tax-return extensions at the AICPA website: “The IRS’s audit selection process is based on what is included (or not included) on the return, not when it’s filed.”

“A rushed-through return is more likely to contain mistakes,” warns the AICPA. “An error-riddled return—or one that’s intentionally missing information—is far more of a red flag [for the IRS] than a carefully prepared and reviewed return that’s filed by the extended due date.”

8. Looking Ahead: Estimated Tax Payments

If you make estimated tax payments, such as for an income spike from stock compensation, the payment for the first quarter of 2021 was still due at the usual time on April 15 (see our blog commentary on this oddity). To avoid any penalties on your tax return next year, be sure you pay the IRS in 2021 either 90% of your expected tax bill or 100% of last year's taxes.

In a typical year, when the due dates for tax returns and the first estimated tax payment are the same, if you file an extension of your tax return on IRS Form 4868 one approach is to overpay the IRS the amount of additional taxes you expect to owe when you file your return. You overpay by what you approximately calculate will be needed for the first estimated tax payment due on April 15. Then you have the amount of the refund go to the first quarter's estimated tax payment.

Paying the first quarter's estimated tax indirectly through the extension could provide some extra funds should the final tax amount due with the actual return be larger. This is an approach followed in the past by Jonathan Gassman, a CPA with the Gassman Financial Group in New York, whom we spoke with while researching this article.

However, in this unusual year, with a month-long difference between the due dates, the IRS issued additional guidance clarifying that the extension filing with the overpayment needed to occur by April 15 to get it credited to the first quarter estimated tax payment. The IRS repeatedly stated, with examples, that "an extension of time to file has no effect on either the date of payment or the date on which an overpayment exists."

For guidance about tax returns and estimated taxes on stock options, restricted stock/RSUs, ESPPs, and SARs, see the Tax Center at myStockOptions.com.


SAVE THE DATES: Upcoming myStockOptions Webinars In May And June 2021

WebinarsImprove your stock comp knowledge and get CE credit hours in our upcoming webinars. Registration is now open for all of these:

Strategies For Concentrated Positions In Company Stock
May 26, 2pm–3:40pm ET, 11am–12:40pm PT
Wealth is won and lost through the management of concentrated company stock positions. With the S&P 500 setting record highs, financial advisors need to understand the wide range of strategies and solutions available for preventing loss of wealth and for meeting clients' financial goals. Join us on May 26 (2pm–3:40pm ET, 11am–12:40pm PT) for our webinar on managing concentrated positions in company stock. In 100 lively minutes, experts at managing concentrated stock wealth will explain the approaches. Register now.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp
June 10, 2pm–3:40pm ET, 11am–12:40pm PT
Restricted stock and restricted stock units (RSUs) have become the most common type of equity compensation. This webinar focuses on financial and tax planning for restricted stock/RSUs to serve clients effectively, build wealth, and prevent expensive mistakes. Join us on June 10 (2pm–3:40pm ET, 11am–12:40pm PT) for this lively educational event. In 100 minutes, it features insights from a panel of three leading financial advisors, including real-world case studies, to provide practical info, guidance, and expertise for restricted stock/RSUs in both public and private companies. Register now.

Stock Option Exercise Strategies: Advanced Bootcamp
June 24, 2pm–3:40pm ET, 11am–12:40pm PT
Employees with stock option grants, whether NQSOs or ISOs, face important wealth-building and tax-minimizing decisions about when to exercise their stock options. This webinar focuses on stock option exercise strategies to serve clients effectively, build wealth, and prevent expensive mistakes. Join us on June 24 (2pm–3:40pm ET, 11am–12:40pm PT) for this lively educational event. In 100 minutes, it features insights from a panel of three leading financial advisors, including real-world case studies, to provide practical info, guidance, and expertise for stock options in both public and private companies. Register now.


Estimated Taxes And Stock Comp: Special Issues In 2021

Confusion

When the IRS extended the tax return deadline to May 17, it kept the usual April 15 due date for the first quarterly estimated tax payment of 2021. This was awkward for the many people planning to base 2021 estimated taxes on 2020 income reported in their Form 1040 tax returns. How are you supposed to know your April estimated tax payment if you haven't yet done your 2020 tax return?

The standard flat 22% federal rate used for tax withholding on stock compensation is usually too low for most employees and executives getting these grants. Paying quarterly estimated taxes is one way to avoid an IRS penalty for tax underpayment. Most people who pay estimated taxes base their payments on the income reported on their tax return to fit into the 100% or 110% safe harbors. Some taxpayers simply finished their returns by April 15 and sent their estimated payments. Others are waiting to act on the first 2021 estimated tax payment until they finish their tax returns.

If you need to pay 2021 estimated taxes and are waiting to finish your 2020 tax return before you make your April payment, this blog commentary explains the issues involved, including insights from tax pros on this unusual situation.

Why 2020 Tax Returns Impact 2021 Estimated Taxes

According to the IRS Data Book, over 22.2 million individual estimated tax forms (Form 1040–ES) were filed in fiscal year 2019. This population of taxpayers includes self-employed people, gig-economy workers, small-business owners, retirees, and investors—a broad cross-section of people with widely varying income levels and occupations, not just the wealthy.

Federal tax law requires all of us to pay at least 90% of our income tax liability through either withholding and/or quarterly estimated tax payments. For those whose income is not subject to withholding, or if you’re a W-2 employee who does not pay enough in taxes during the year via payroll withholding, you pay quarterly estimated taxes on April 15, June 15, September 15, and January 15 of the following year (dates may vary slightly for weekends or holidays).

Why The IRS Did Not Want To Move Estimated Tax Due Date

In spite of widespread pressure from tax professionals to have the dates match, including from CPAs and enrolled agents (EAs), the IRS refused. This caused an uproar in the tax profession and has even led to congressional legislation attempting to shift the date.

The IRS remained adamant in not moving the April date. To explain why, IRS Commissioner Charles Rettig made the following statement in a recent congressional hearing: "There’s a large contingent of wealthy individuals in this country who do not make their estimated payments and who essentially take the money they should be paying in quarterly estimated payments to the government and take the arbitrage, invest it, and we’re not going to give them a break of interest and penalties to do so."

He also said that "this issue is, where do we draw a line, and that line will quickly run to wealthy individuals who game the system." You can hear these statements in the video, around 1:13 and 1:42.

Phyllis Jo Kubey, EA, the president of the NY State Society of Enrolled Agents, told me her view of these statements, a sentiment echoed by every tax-return professional I contacted. "I was horrified to hear Commissioner Rettig’s remarks about not wanting to create an arbitrage opportunity for wealthy taxpayers. Most of my clients who pay estimated taxes are musicians, clergy, and senior citizens—and most have adjusted gross incomes (AGIs) well below $100K." Additionally, she said, the administrative complexity of keeping the estimated tax due date April 15 when the returns are due May 17 is "huge for taxpayers, tax professionals, and (I suspect) for the IRS."

For guidance on tax returns and estimated taxes on stock compensation (stock options, restricted stock/RSUs, ESPPs, and SARs), see the Tax Center at myStockOptions.com.


Webinar: Stock Compensation Bootcamp for Financial Advisors

Gettyimages-943045290-612x612

Equity compensation is booming. Improve your stock comp fitness in this webinar on the essentials of stock options, restricted stock/RSUs, and ESPPs.

Register now for this lively educational event on April 29 (2pm–3:40pm ET, 11am–12:40pm PT), offering 2.0 CE credits for CFPs and CEPs.

In just 100 lively minutes, learn what you need to know to serve clients better, build wealth, and prevent mistakes. Whether you are new to equity comp or want to sharpen your knowledge, the practical info and insights will help maximize your success.

Time conflict? No problem! All webinar registrants get access to the recording and the presentation slide deck.


ESPPs: 6 Big Tax-Return Mistakes You Can Avoid By Reading This Article

tax time

While the tax-return filing deadline has been postponed to May 17, the potential for confusion and mistakes on tax returns involving stock compensation remains as great as ever. It looms especially large when you have shares acquired from an employee stock purchase plan (ESPP), whose basic taxation is already confusing enough. ESPP reporting even confuses experienced accountants and other tax experts. Errors can lead to tax overpayments or, much worse, scrutiny from IRS auditors.

However, the benefits of ESPPs are well worth the tax complexity. ESPPs can be very valuable for employees, as explained in an article at myStockOptions, and a little tax guidance goes a long way. In the article below, we explain six big reporting mistakes to avoid when you have ESPP compensation income or sell shares acquired from purchases under your plan. Some of these also apply when you have stock options or restricted stock units.

1. Paying tax too early on the discount. While there are various types and designs for ESPPs, a tax-qualified ESPP under Section 423 of the Internal Revenue Code lets you buy company shares through after-tax payroll deductions at a discount of up to 15%. When this type of ESPP is involved, you should not include the discount as part of your taxable income for the year of purchase unless you also sold the shares in the same year.

When you don't satisfy the ESPP holding periods (more than two years from enrollment and one year from purchase), you have compensation income in the year of sale equal to the spread at purchase, i.e. the difference between the fair market value of the stock on the purchase date and the discounted price you actually paid for it.

Example: Your company offers a 15% discount with a lookback that calculates it on the lower of the stock price at the offering start or on the purchase date.

  • Market price: $50 at the start of the offering and $55 on the purchase date
  • Purchase price: $42.50 (85% of $50)

Table

For ESPPs that are not tax-qualified under IRC Section 423, the taxation is similar to that of nonqualified stock options (NQSOs). The purchase income for this type of ESPP is reported and appears on your Form W-2 for the year of purchase, regardless of whether you sell the stock, and the same reporting issues for NQSOs apply after you sell the shares.

2. Not filing Form 8949 after an immediate sale of ESPP shares at purchase. With an immediate sale of your ESPP shares at purchase, the discount is reported on your Form W-2 and on your tax return as ordinary income. Even though you never held the stock (or at least not for long) after purchase, you still need to report this sale transaction on Form 8949 and Schedule D, which are used to report capital gains and losses on all stock sales.

You may even have some small gains or losses, depending on how your company calculates the discount at purchase, how long it takes for the shares to become available in your account, and any commissions and fees for the stock sale.

Alert: If the IRS were to receive a report of your sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, 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 taxes due on the full amount of the sale proceeds.

Form8949

3. Directly using what appears as the cost basis on your Form 1099-B. Under IRS rules, the Form 1099-B issued to you by your broker cannot report the compensation element as part of your cost basis. Only the purchase price will appear, and the basis does not need to be included for stock that was purchased before 2011. This means you must check the accuracy of the basis and make any necessary adjustments on Form 8949.

Alert: When compensation income is not part of the tax basis reported in Box 1e on Form 1099-B, make a gain or loss adjustment in column (g) of Form 8949, and enter code B in column (f), among other steps. Should Box 1e be blank, report the full basis in column (e).

See the section Reporting Company Stock Sales at myStockOptions for our popular annotated diagrams of Form 8949. These show the proper tax-return reporting for sales of shares acquired from ESPPs, stock options, and restricted stock units.

4. Paying the wrong tax on the discount. The full ESPP purchase discount doesn’t qualify for capital gains treatment even when you have held your stock for more than one year after the date of purchase, and for more than two years after the beginning of the offering period. With a tax-qualified (Section 423) ESPP, you’ll still have ordinary income in the year of sale equal to the lesser of either the actual gain upon sale or the purchase price discount at the beginning of the offering. But beyond the discount, all additional gain is treated as long-term capital gain.

5. Using the wrong price when there is no lookback. If your company’s ESPP does not have a lookback feature, the actual discount for the stock purchase and for tax purposes will often differ with a qualifying disposition that provides the best tax treatment, adding to the potential for tax-return mistakes. Even with an ESPP that has no lookback, the purchase price discount for calculating the ordinary income for the taxes is still computed from the price on the first day of the offering period and not on the purchase date.

6. Paying tax twice on the discount. With ESPPs, the purchase discount for tax purposes is reported to the IRS on Form W-2 and is included in your income in the year of sale. Thus, when you sell the shares, do not make the purchase price your cost basis without following other steps when you complete Form 8949 to report the sale. Avoid double taxation on the discount by understanding what the cost basis on your 1099-B includes, why it may be wrong, and how to make an adjustment on that IRS form (see #3 above).

You will also mistakenly double-report income if you do not realize that your W-2 income in Box 1 already includes stock compensation income. What your company may have voluntarily reported in Box 14 of Form W-2 does not change the Form 1040 reporting. You may wrongly think it was left out of Box 1 because there is no tax withholding or employment tax (i.e. Social Security and Medicare) on a tax-qualified ESPP, and then erroneously report the income as “Other income” on Schedule 1.

Doing that would cause the income to be taxed twice as ordinary income, as it was already included in the W-2 income reported on Line 1 of Form 1040.

Form1040line1

Tax-Season Resources

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. Just for fun, try the tax-return quiz to test your knowledge.


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

Tax-season-webinar-2021Tax 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.

All the essentials of tax returns for equity comp are presented in just 75 fast-paced minutes. Register to stream the recording.


Tax Returns Involving Nonqualified Deferred Comp: What You Need To Know In 2021

tax-season help

Tax season is a busy time at myStockOptions. It's also a busy time at our sibling website myNQDC, all about nonqualified deferred compensation (NQDC) plans. These plans let you defer more income in addition to what you can defer via qualified retirement plans, such as a 401(k).

Based on the tax resources at myNQDC, below is a quick take on things to be aware of when your tax return involves nonqualified deferred comp. (These items are separate from the 2018 tax changes, which still affect rates and brackets that apply for your tax return.)

Changes In Reporting On IRS Form 1040

The IRS Form 1040 tax return has been revised again for the 2021 tax season. Distributions from NQDC plans, as well as salary income, are now reported as part of income on Line 1 of Form 1040.

See also the related FAQ at myStockOptions for details on changes in Form 1040 reporting (estimated taxes, capital gains, alternative minimum tax) and on the new Form 1099-NEC for reporting nonemployee compensation.

W-2 Reporting Still Potentially Unclear

The IRS has still not finalized the Section 409A rules on W-2 reporting. Therefore, your company does not need to indicate deferred income on your Form W-2, though it may do so voluntarily in Box 14. (Once the IRS has finalized the 409A rules on W-2 reporting, income deferred during the year will have to be indicated with Code Y in Box 12.) Distributions from plans usually appear in the W-2 boxes used for wages and other compensation, along with Box 11 for nonqualified plans (see an FAQ at myNQDC).

What To Do If Your Company’s NQDC Plan Violates Section 409A

If your plan violates Section 409A and you need to pay a penalty and interest:

  • Report this on Line 8 of IRS Schedule 2 (no longer directly reported on Form 1040).
  • Check Box c.
  • Enter the amount with the code NQDC.

2020-sch-2

This total on Schedule 2 is then entered on Line 23 ("Other taxes") of Form 1040. This is a change (it was different in prior years).

Depending on your employment status, the income that is subject to this additional tax will appear on Form W-2 or on the revised Form 1099-MISC and new Form 1099-NEC.

Alternative Minimum Tax

Consider the alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate. Nonqualified deferred compensation itself is not an AMT preference item. However, deferrals of income can serve to prevent you from triggering the AMT in a tax year; conversely, income you receive in a distribution can trigger the AMT. While the 2018 tax changes reduced the likelihood of triggering the AMT by raising the exemption amounts and phaseout thresholds, you still need to calculate it (see a related FAQ at myStockOptions).

Need An Extension?

For 2020 tax returns, the usual April 15 filing deadline has been postponed to May 17, 2021. If you still need to file an extension of your tax-return deadline because of nonqualified deferred compensation, see the myNQDC FAQ on mistakes to avoid with extensions. Also, even with the delayed filing deadline, your first-quarter 2021 estimated taxes remain due by April 15.

Did you also have income from equity compensation or sell shares acquired from equity compensation? See the popular resources in the Tax Center at our sibling website myStockOptions.

More Tax Resources At myNQDC

The tax section of myNQDC has a full range of resources on tax returns that involve NQDC. For new Premium Memberships and renewals, please contact us (617-734-1979, [email protected]). We can process your membership directly by phone or email you an invoice.

Want to license readable, high-quality educational content on NQDC plans for participants, clients, or prospects? Find out about our corporate services in the About Us and Licensing sections of myNQDC. Please contact us (617-734-1979, [email protected]) to obtain more information about licensing content for your website, print materials, and/or newsletters, and for premium memberships at special bulk rates for your staff.


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

Tax-season-webinar-2021Tax 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.

All the essentials of tax returns for equity comp are presented in just 75 fast-paced minutes. Register to stream the recording.


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

Tax-homeworkOnce 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.

Webinar-advertThe 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.

Form1040line7

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.

6251

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.


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

Tax-season-webinar-2021Mar 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.


Take The Stress Out Of Tax Day: 8 Key Things To Know About Tax-Return Extensions

tax return stress

Tax Day 2020 is July 15. If you haven't yet filed your federal tax return, you need to decide whether to go for it now or get an extension.

In any tax year, stock compensation incomee.g. from an NQSO exercise, an ISO or ESPP disqualifying disposition, or the vesting of restricted stockcan raise your income tax and make your return complex. You may just need a little extra time, especially with everything else going in the world right now. The good news is that, if you can't file by July 15, you can get an extension of your filing due date without any questions asked.

However, you must understand the rules. To avoid getting hit with IRS penalties, particularly if you don’t have the money to pay taxes owed with your 2019 Form 1040 tax return, below are 8 crucial things to know about filing an extension.

1. Extension Does Not Need IRS Approval

To gain an automatic extension for the due date of your tax return (to October 15), you can use IRS Form 4868Application For Automatic Extension Of Time To File. Alternatively, you can file for an extension through the IRS Free File system.

The IRS automatically processes a tax-return filing extension if you pay all or part of your taxes electronically by the deadline. You don't need to file a paper or electronic Form 4868 when making a payment with IRS Direct Pay, the Electronic Federal Tax Payment System, or with a debit or credit card. Simply select "extension" as the reason for the payment.

“Extensions are typically for six months, but this year it will only be a three-month extension due to the change in the tax deadline,” explains Susan Allen, Senior Manager for Tax Practice & Ethics at the American Institute of CPAs (AIPCA).

2. Extension Does Not Delay Taxes Owed Or IRA Deadline

The extension to October 15 applies only to the filing of your tax return. It does not delay any tax you may owe beyond what you already paid the IRS in withholding and/or estimated taxes. To avoid penalties, be sure to pay taxes you expect to owe by the July 15 IRS filing deadline. Note that the extension also does not delay the deadline for making 2019 contributions to IRAs and HSAs beyond July 15.

“The best practice, assuming it does not create financial hardship, is to estimate as accurately as possible what you will owe for 2019 and pay it on or before July 15,” suggests Phyllis Jo Kubey, EA, the incoming president of the NY State Society of Enrolled Agents.

3.  File Your Tax Return Even If You Cannot Pay Taxes Owed

Susan Allen of the AICPA encourages people to file their tax returns on July 15 even if they cannot pay right now. To avoid a late-filing penalty, file your return on time and pay as much as you can. The IRS will then send you a bill or notice for the remaining amount you owe, including any penalties and interest. If you can’t pay that now, see #4 below.

4.  You Can Work Out A Deal With The IRS

If you lack the money to pay your income tax, consider asking to pay by installments or working out with the IRS an online payment agreement, an offer in compromise, or a temporary delay in collection until your financial situation improves.

“It is an extension to file and NOT an extension to pay,” notes Beth Logan, EA, who works with Kozlog Tax Advisers and is a past president of the Massachusetts Society of Enrolled Agents. “If you’re filing an extension to avoid your tax bill, you are only hurting yourself.”

Logan recommends that you send the return and then contact the IRS or get a tax return professional (an Enrolled Agent and/or CPA) to contact the IRS for one of these payment methods. Many states, she explains, also offer a delay in paying for hardships, such as unemployment. A delay doesn’t make the taxes go away, but at least the tax authorities will leave you alone for a while (up to two years in Massachusetts).

“For most people, the interest rate on their credit cards far exceeds the interest rate charged by the IRS or the states,” Logan warns. “Therefore, you are usually better off on a payment plan than using a credit card for unpaid taxes.”

5. IRS Has Different Penalties For Failure To File And Failure To Pay

As outlined on its website, IRS has different penalties for failure to file your tax return and for nonpayment or underpayment of taxes owed. To avoid an underpayment penalty, when you file a tax-return extension you need to have paid at least 90% of the total actual income tax for the year of the return. This means that if you end up paying more than 10% of your total tax owed with your actual return after the deadline, interest and penalties will apply.

As the IRS explained in its recent announcement that the tax return due date is still July 15, interest and late-payment penalties continue to accrue on any unpaid taxes after July 15. However, the penalty rate for failure to pay tax is cut to half while an installment agreement is in effect. The usual rate of 0.5% per month is reduced to 0.25%. For the calendar quarter beginning July 1, 2020, the interest rate for underpayment is 3%.

The penalty for failing to file is generally more costly than the penalty for failing to pay, explains Susan Allen of the AICPA. The penalty for missing the initial filing due date or the extended deadline is 5% of the balance due for each month, or part of a month, up to a maximum of 25%. The IRS does not assess penalties for both failure to file and failure to pay for the same period.

Alert: In 2020, the minimum penalty for the failure to file a federal tax return within 60 days after the due date is either $435 or 100% of unpaid tax, whichever is lower.

6. Remember To File An Extension For Your State Tax Return

Don't forget about your state tax return. Most states also shifted their tax-return deadlines to July 15. For example, if you pay tax to the state of California and cannot file by the due date, you get a filing extension. As with your federal return, you will still need to pay a specified percentage (e.g. 90%) of any tax you owe by the filing deadline.

7. Extension Does Not Increase Risk Of IRS Audit

This is a myth, as explained in a quiz on tax-return extensions at the AICPA website: “The IRS’s audit selection process is based on what is included (or not included) on the return, not when it’s filed.”

“A rushed-through return is more likely to contain mistakes,” warns the AICPA. “An error-riddled return—or one that’s intentionally missing information—is far more of a red flag [for the IRS] than a carefully prepared and reviewed return that’s filed by the extended due date.”

8. Looking Ahead: Estimated Tax Payments

If you make estimated tax payments, such as for an income spike from stock compensation, the payments for the first two quarters of 2020 (normally due in April and June) are also due on July 15. To avoid any penalties on your tax return next year, be sure you pay the IRS in 2020 either 90% of your expected tax bill or 100% of last year's taxes (for adjusted gross incomes over $150,000, it is 110%) through withholding and/or estimated taxes. For more on estimated taxes in 2020, see a Forbes.com article by myStockOptions editor-in-chief Bruce Brumberg: Estimated Taxes Due July 15: Tax Return Pros Warn About Special Issues For 2020.

For guidance about tax returns and estimated taxes on stock options, restricted stock/RSUs, ESPPs, and SARs, see the Tax Center at myStockOptions.com.


Webinar: Financial Planning For Equity Comp During The Pandemic

rollercoaster ride

The impacts of Covid-19 have been a wild ride. After a steep swings in the markets, financial planning continues to be tested by ongoing volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate planning approaches.

Join us on July 22 (2:00pm–3:00pm ET) for a special webinar: Financial Planning For Stock Compensation During The Pandemic. It will cover the current state of equity comp, the related financial planning amid the pandemic, and the impact of Covid-19 on markets, the economy, and employment. Bruce Brumberg, editor-in-chief of myStockOptions, will moderate a panel discussion by three leading financial advisors and a top compensation consultant. See the webinar page for details and registration.


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

tax helpThere'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.


2020conference

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!