The myStockOptions Blog

Extra Innings: Tax-Return Extensions, Tax Planning For 2019, And How To Avoid IRS Penalties

Tax-return season is in the ninth inning as the IRS deadline of April 15 approaches. Many issues can complicate a tax return involving income from stock compensation or stock sales, particularly this year. The new Form 1040, shifts in the reporting of capital gains tax and AMT, and the changes under the Tax Cuts & Jobs Act have made this tax season very challenging.

Need to take your tax game into extra innings? Fortunately, the process for getting a filing extension is easy. However, it's easy to make mistakes that lead to IRS penalties.

How To Get An Extension

If you need extra time for your tax return, you can get an extension of the federal filing deadline by up to six months. No explanation or signature is needed. You can request an extension in any of three traditional ways: on IRS Form 4868, through a paid tax preparer, or via tax-return software.

It's vital to understand that an extension of your tax-return deadline applies only to the filing of your return, not to the tax itself, which you must still pay by the original IRS filing deadline. Therefore, if you get an extension you must accurately estimate how much tax you must pay no later than April 15. By paying (or having paid through withholding and estimated taxes) 100%, you avoid interest and penalties. If you can't manage that, you can still avoid the penalty by paying 90%. For any additional taxes owed when you eventually file, you will have to pay interest on the unpaid amount going back to the original April due date.

The penalty for failing to file is generally more costly than the penalty for failing to pay. For more details on extensions to file and on the penalties for the late payment of taxes, see the FAQ on this topic at myStockOptions.com. If your state has its own income tax (most do), it has its own procedures, rules, deadlines, and penalties for filing an extension and for estimated taxes (discussed below).

Looking Ahead: 2019 Income And Estimated Taxes

When your federal and state tax returns are done and you’re ready to move on with your life, you want to make projections of your income in 2019. You should hurry with this, as the first quarter estimated tax payment is due the same day as your Form 1040 tax return!

Now that you have experienced the impact of tax changes under the Tax Cuts & Jobs Act, whether it be the loss of personal exemptions, the larger standard deduction, or the limit on your property tax deduction, you can make adjustments on your Form W-4 for withholding. The IRS commissioner has urged employees "to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019."

If you expect additional income in 2019 that will not be covered from regular withholding, such as supplemental wage income (e.g. income from a big cash bonus, RSU vesting, or stock option exercise after an IPO) you want to evaluate the need to make estimated tax payments, or at least see whether you can adjust your salary withholding. To avoid penalties, be sure you pay the IRS either 90% of your expected 2019 tax total or 100% of last year's taxes, although it’s 110% for adjusted gross incomes over $150,000. (For 2018 taxes, the IRS lowered the 90% threshold to 80%: see IRS Notice 2019-25.)

Penalties are calculated on a quarterly basis, so you must make estimated tax payments in the quarter when you earned the income. Use IRS Form 2210 to calculate whether any penalty is owed for underpaying your estimated tax and, if so, the amount of the penalty. You can request a waiver of the underpayment penalty along with Form 2210 if you have a reasonable justification for the underpayment. For the 2018 tax year, we have heard from tax preparers that the IRS is expected to be more lenient in giving out penalties, given all the tax changes and the confusion over the adjusted withholding tables.

Details on estimated taxes, including a worksheet and all the due dates, are covered in the instructions for IRS Form 1040-ES. If you have stock compensation, see the FAQs on estimated taxes at myStockOptions.com.

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Register For Our National Financial-Planning Conference

Our special one-day conference is coming up soon: Financial Planning For Public Company Executives & Directors.

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

In a fresh lineup of talks and panel sessions, attendees will hear from leading experts on many topics:

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

Continuing education, including 8.0 CFP® credits and 7.0 CEP credits, is available. You can register and make hotel reservations now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, [email protected]).

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

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

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

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

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

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

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

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

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

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

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Register For Our National Financial-Planning Conference

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

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

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

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

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

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

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

Cost-Basis Basics

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

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

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

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

Cost-Basis Confusion

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

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

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

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

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

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

Then you take the following steps.

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

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

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

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

Additional Resources To Help You Avoid Overpaying Taxes

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

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Register For Our National Financial-Planning Conference

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

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

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

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

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

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

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

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

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

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

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

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

Alert: If the IRS receives a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, the IRS will conclude that you failed to report the gain on the sale. IRS computers are efficient at matching information on related tax forms. Using a tax basis of $0, the IRS computers will then automatically send you a notice (CP-2000) for the taxes due on the full amount of your sale proceeds.

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

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

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

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

Tax-Season Resource

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

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Register For Our National Financial-Planning Conference

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

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

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

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

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

How To Make Sense Of The Major Changes In IRS Tax-Return Forms And Filing Rules

Surprise! Tax-return forms and reporting have significantly changed for the 2019 filing season, adding yet more confusion to an already complicated process. Read on for an overview of the changes, the related issues, and some resources that will take the fear out of filing and help you complete an error-free tax return with confidence.

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

While the tax treatment for stock compensation and sales of company stock has not changed, major changes have occurred in where and how the related items are reported on the IRS Form 1040 tax return. The IRS has:

• condensed Form 1040 from 73 lines to just 23 lines
• eliminated Forms 1040A and 1040EZ
• created six new schedules that funnel information to Form 1040

The way capital gains and the alternative minimum tax (AMT) are reported on tax returns has also changed. Meanwhile, the tax reform that took effect at the start of 2018 altered the income-tax rates and brackets.

An article at myStockOptions.com explains everything that taxpayers with stock compensation must know about the changes in tax forms and reporting.

The Confusing Cost-Basis Rules For Stock Sales

Beyond the changes in tax forms and reporting, tax returns involving stock compensation are inherently complicated. One of the biggest areas of potential confusion is the cost basis of shares sold during the tax year.

By mid-February, brokerage firms send IRS Form 1099-B, or the firm's equivalent substitute statement, to clients who sold shares during the tax year. The information on Form 1099-B is also reported to the IRS. The required stock-sale information on Form 1099-B includes not only the gross proceeds from stock sales but also their cost basis (sometimes called the tax basis), the date when the shares were acquired, and whether gains or losses were short-term or long-term.

Form 1099-B is essential for completing IRS Form 8949, Schedule D, and Schedule 1, all of which taxpayers who sold shares during the tax year must submit with the Form 1040 tax return. Form 8949 is where taxpayers list the details of each stock sale, using the information on Form 1099-B. Schedule D aggregates the column totals from Form 8949 to report total long-term and short-term capital gains and losses. The total from Schedule D is entered on Schedule 1, which is attached to the Form 1040 return. However, the cost-basis information in Box 1e of Form 1099-B may be too low, or the box may be blank. This is because the rules for cost-basis reporting are somewhat counterintuitive. Also, no basis is reported for restricted stock or restricted stock units.

A diverse set of content at myStockOptions.com clearly summarizes the issues, explains how to understand Form 1099-B after selling shares from stock compensation or an ESPP, and shows how to avoid mistakes with the cost basis that can lead to the overpayment of taxes:

• Article: How To Avoid Paying Too Much Tax: Understanding Form 1099-B And Form 8949 For Reporting Stock Sales On Your Tax Return
• FAQ: How have IRS Form 1099-B and cost-basis reporting changed for sales of stock acquired from my stock options, restricted stock, or ESPP? What do I need to do differently because of the changes?
• FAQ: What if the wrong cost basis is reported on my 1099-B? How do I report the right cost basis on Form 8949 of my tax return?
• Video: Tax-Return Reporting Of Company Stock Sales: How To Avoid Overpaying Taxes
• Video: Tax Return Forms & Reporting Rules For Stock Sales

Putting It All Together On Your Tax Return

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

The Tax Center also has in-depth articles on general tax-return topics. These include:

• 12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs
• Restricted Stock & RSUs: 10 Tax-Return Mistakes To Avoid
• NQSOs: Tax Return Tips And Traps
• ISOs: Tax Return Tips And Traps

Resources For Stock Plan Participants And Companies

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Companies can help their stock plan participants make the most of their equity compensation by giving them resources for avoiding expensive mistakes on tax returns.

The excellence of our resources is attested by recent prominent coverage by PLANSPONSOR and by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or [email protected]).

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Register For Our National Financial-Planning Conference

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

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

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

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

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

IRS Form 1040 Simplification: Good News And Bad News For Reporting Stock Sales And The AMT

If you haven't heard the good news, permit yourself a brief celebration. The IRS has simplified the iconic Form 1040 tax return in ways it believes will benefit most taxpayers. The 2018 Form 1040 has been condensed from the prior 73 lines to just 23 lines.

However, for people reporting capital gains from stock sales or alternative minimum tax (AMT) from ISO exercises, that's where the simplification ends.

To feed information to the shortened Form 1040, the IRS created six new “schedules” (supplementary forms). Many of the lines removed from the surface Form 1040 document now occur on those schedules, which funnel information to it. Among the lines the IRS form designers moved to the schedules are the lines for reporting capital gains and the alternative minimum tax (AMT).

The IRS calls its revision a “building block” approach. In the belief that most taxpayers were not using most of the sometimes bewildering 73 lines on the previous version of Form 1040, the IRS shortened the document to make filing less confusing to the average taxpayer. The method is roughly similar to how you would declutter your desk, putting items you seldom use into drawers (the new schedules) while keeping on the surface your most frequently desired objects. So if you’re not what the IRS considers an average taxpayer, your challenge now is to find which drawer holds the item you need, such as capital gains reporting for sales of stocks, ETFs, mutual funds, or other securities.

Be Aware Of What’s Changed

Executives and key employees at many companies will note some potentially disruptive changes in what goes where for important parts of their compensation and income. Below are the major changes to know about that affect where to report income from compensation—such as salary, cash bonuses, stock option exercises, restricted stock/RSU vesting, and ESPP purchases—or gains from sales of company stock.

Compensation Reporting

Stock compensation as well as salary and cash bonus income is now reported on Line 1 of Form 1040 (previously Line 7). If you see any article on the internet that tells you that salary income goes on Line 7, you know it’s out of date!

Stock-Sale Reporting

When you are reporting a sale of stock or another security, you still first report it on IRS Form 8949 (if needed for the tax-basis adjustment) and enter the totals from 8949 on Schedule D. That part has not changed. However, Form 1040 no longer has a line labeled "Capital gain or (loss)." In comments on the draft revision of Form 1040, this blogger urged (to no avail) the IRS to add it back to the main lines on Form 1040, given that gains from security sales are now a major source of income for many middle-class and affluent taxpayers.

With the new forms, you follow a different route. The total from Schedule D is now entered on Line 13 of the new Schedule 1 ("Additional Income and Adjustments to Income").

You attach Schedule D to Schedule 1. Totals from all the lines on Schedule 1 funnel into Form 1040 as part of the amount reported on Line 6 ("Total income").

AMT Reporting

The Tax Cuts & Jobs Act makes it much harder to trigger the AMT, so it makes sense that the IRS moved the AMT reporting from the surface Form 1040 to the metaphorical desk drawer of a supplementary schedule (Schedule 2). While the alternative minimum tax (AMT) remains a concern for anyone with incentive stock options (ISOs), is no longer directly reported on Form 1040 from the calculation on Form 6251. Instead:

• The AMT, if owed, from the Form 6251 calculation now goes into Line 45 of Schedule 2 ("Tax"). Attach Form 6251 to Schedule 2. The totals from this schedule go into Line 11 of Form 1040.
• Form 6251 has new numbers for all of its lines. The spread at ISO exercise is reported on Line 2i (previously Line 14). When the ISO stock that triggered the AMT is sold, the difference from the ordinary tax is reported on Line 2k (previously Line 17).
• The AMT credit that is generated for an ISO exercise that triggers the AMT is recouped through Form 8801, as in the past. The amount from Line 25 of Form 8801 now goes into Schedule 3 ("Non-Refundable Credits") on Line 54 (check box b). The totals from Schedule 3 go into Line 12 of Form 1040.

Rules For Cost-Basis Reporting for Stock Sales

For stock sales, there is no change in the IRS rules on how the cost-basis information is reported on Form 1099-B and Form 8949. For grants made in 2014 and later years, brokers are prohibited from including equity compensation income (which appears on Form W-2) in the cost basis reported on Form 1099-B. This creates confusion and complications with tax-return reporting, as only the exercise cost appears on the 1099-B, and with restricted stock/RSUs the cost basis on the 1099-B is therefore zero or blank.

For guidance on the tax-return reporting for sales of shares acquired through stock compensation, including annotated diagrams of Form 8949 and Schedule D, see the section Reporting Company Stock Sales in the Tax Center at myStockOptions.com.

So You Have Stock Compensation And Your Form W-2 Just Arrived: Now What?

Snowflakes aren't the only things in the air right now. Employers all over the United States are sending Form W-2 to their employees for use in completing their tax returns. Form W-2 doesn't just report your salary to you and the IRS. It also includes income from any other compensation sources you may have, such as stock options, restricted stock, restricted stock units, employee stock purchase plans, and cash bonuses.

If you have income and withholding from supplemental wage income (such as stock compensation), making sense of what’s reported and why can be hard to decipher. You and your CPA or other tax-return preparer must understand where that income is reported on the W-2 to properly complete your Form 1040 tax return and avoid costly mistakes.

Restricted Stock, RSUs, Performance Shares

Vesting of restricted stock, share delivery from restricted stock units (RSUs), and vesting of performance shares all trigger W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types, assuming you did not elect to defer share delivery at vesting (only permitted in RSU plans at small number of companies).

Income is included in the following places:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (to income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)

Taken from our Tax Center's Form W-2 section, the W-2 diagram below shows where the income and withholding appear for restricted stock units (click on the image to enlarge it):

If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, shows the income and withholding.

Stock Options

If you exercised nonqualified stock options (NQSOs) last year, the income you recognized at exercise is reported on your W-2. It appears on the W-2 with other income in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)
• Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. It’s an IRS requirement just for NQSOs. The withholding appears in the same boxes as in the diagram above for restricted stock.

ISOs

With incentive stock options (ISOs), the value of the exercise income appears on Form W-2 only if you made what is technically called a disqualifying disposition. That means you sold or gifted the stock before you met the required holding periods of one year from exercise and two years from grant.

In this situation, the income appears on the W-2 as compensation income. The amount depends on whether you sold the stock at a higher or lower price than the market price on the exercise date. Unlike with NQSOs, your company does not withhold taxes on ISO exercises, and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you have held the shares. For a nonqualified ESPP, you have withholding on the income you recognized at purchase, and that income and withholding are reported on your W-2, as with nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares, and you have no withholding.

Annotated Diagrams of Form W-2 Can Help

For more details on how to interpret the W-2 reporting for equity compensation, see our Tax Center at myStockOptions.com. It has a special section of FAQs with annotated Form W-2 diagrams that illustrate where the income and withholding amounts should appear for all types of stock grants and ESPPs. (Meanwhile, executives who have nonqualified deferred compensation will want to see the FAQs in the Taxes: Reporting section of myNQDC.com, a sibling website of myStockOptions.com.)

Form 3922 For ESPPs And Form 3921 For ISOs

Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2018, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you will receive from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic).

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. You will find this content in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers.

Shooting For Overtime With Your Tax Return: IRS Filing Extensions, How To Get One, And Stock Comp Planning For 2018

For those who haven't yet filed federal tax returns, it's getting late in the fourth period, but there is still time to beat the IRS buzzer. The deadline for filing tax returns with the IRS for the tax year 2017 is April 17, 2018.

In any tax season, the recognition of income from stock compensation or an employee stock purchase plan can complicate your return. Examples include income from an NQSO exercise, an ISO or ESPP disqualifying disposition, or the vesting of restricted stock. However, as regular readers of this blog will know, this tax season has the potential to be more confusing than most if you sold any stock last year. Issues are especially likely to arise with the cost basis as reported on Form 1099-B and with the tax-return reporting on Form 8949 and Schedule D. For help, including annotated diagrams of Form 8949 and Schedule D, see the special section of myStockOptions.com called Reporting Company Stock Sales.

Can't Beat The Buzzer? IRS Deadline Extensions For Tax Returns

If you need to take the game into overtime, you can get an extension of the federal filing deadline by up to six months. No explanation or signature is needed. You can request an extension in any of three traditional ways: on IRS Form 4868, through a paid tax preparer, or via tax-return software.

Note that an extension for your federal tax return applies only to the filing of your return, not to the tax itself, which you must pay by the original IRS filing deadline.Therefore, if you get an extension you must accurately estimate how much tax you must pay by the 17th. By paying 100%, you avoid interest and penalties; if you can't manage that, you can still avoid the penalty by paying 90%. If you owe additional taxes when you eventually file, you will have to pay interest on the unpaid amount going back to the original April due date.

For more details on extensions to file and the penalties for the late payment of taxes, see the related FAQ at myStockOptions.com.

Looking Ahead: 2018 Income

When your federal and state tax returns are finally done and you're ready to move on with your life, you may want to make projections of your income in 2018. These should be done with the following three planning points in mind.

First, as in the past few years, individuals who expect income of more than $200,000 this year ($250,000 for married joint filers) should consider the additional Medicare taxes on ordinary income and investment income that were introduced by the Affordable Care Act (Obamacare). Despite the failed efforts last year to repeal Obamacare, it and the taxes introduced to fund it are still in effect.

Second, consider the tax changes that took effect in 2018 under the Tax Cuts & Jobs Act, which has provisions that directly and indirectly affect stock compensation. For details on the impact of these changes on planning for stock compensation and company shares, see the related article on myStockOptions.com.

Third, if you expect additional income from stock comp in 2018, and if your withholding rate will be inadequate to cover the taxes you will owe for the full year, you may want to make estimated tax payments, or at least see whether you can adjust your salary withholding. (The withholding rate for supplemental income, such as equity compensation, is 22% up to $1 million during the calendar year and 37% for yearly income in excess of $1 million.) To avoid penalties, be sure you pay the IRS either 90% of your expected tax bill or 100% of this year's taxes (for adjusted gross incomes over $150,000, it is 110%). Penalties are calculated on a quarterly basis, so you must make estimated tax payments in the quarter when you earned the income.

Note: Details of estimated taxes, including the due dates, are discussed in IRS Form 1040-ES, and on myStockOptions.com in the sections NQSOs, ISOs, Restricted Stock, and SARs.

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Register For Our Financial-Planning Conference

We are preparing to hold our first-ever conference, a one-day event: Financial Planning for Public Company Executives & Directors (Monday, June 18, 2018). Taking place in the Boston area, this is a must-attend national conference for financial, tax, and legal advisors working with or wanting to counsel executives, directors, and high-net-worth employees. We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:

• trends of importance to advisors
• tax, estate, and SEC-related planning challenges
• methods for attracting and advising high-net-worth clients
• case studies and other examples of successful planning strategies

CE credits will be available! Register at the conference website or contact us for more information (617-734-1979, [email protected]).

Employee Stock Purchase Plans: The Biggest Tax-Return Mistakes To Avoid

The potential for confusion and mistakes on tax returns looms large for people who sold shares acquired from employee stock purchase plans (ESPPs), whose basic taxation is confusing enough to begin with. Understanding the important issues will help you to prevent overpaying your taxes or incurring complications with the IRS for underpaying.

Below we present five common errors (and how to avoid them) that involve misreporting income from ESPP purchases or stock sales on your tax return. See also the Tax Center at myStockOptions.com for comprehensive coverage of tax-return topics involving ESPPs and all other types of equity compensation.

1. 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 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. For an annotated example showing how you report this on these forms, see a related FAQ at myStockOptions.com.

Alert: Even if you sold all of your ESPP stock immediately at purchase and all of the resulting income is on your W-2, you still must report the sale on Form 8949 and Schedule D. 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, 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 notice for the taxes due.

2. Paying tax on the discount too early. Depending on the design of your company's ESPP, Section 423 of the Internal Revenue Code lets you buy company shares through after-tax payroll deductions at a discount of up to 15% off the fair market value of your company's stock. 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, 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.

For sales of shares acquired from ESPPs that are not tax-qualified under IRC Section 423, the taxation, along with the potential reporting mistakes, is similar to that for NQSOs. The income would be reported, and would appear on your W-2, in the year of purchase, regardless of whether you sell the stock. For details and an example of the tax treatment, see the related FAQ at myStockOptions.com.

3. Directly using what appears as the cost basis on your Form 1099-B. The expanded Form 1099-B cannot report the compensation element as part of your cost basis, as only the purchase price will appear, and the basis does not need to be included for stock that was purchased before 2011. (For details, see a related article at myStockOptions.com.) This means you must check the accuracy of the basis and make any necessary adjustments on Form 8949.

See the section Reporting Company Stock Sales for annotated diagrams of Form 8949 for ESPP stock sales.

4. Paying the wrong tax on the discount. The discount doesn't qualify for capital gains treatment even when you have held your stock for longer than one year. If you hold the shares for more than one year after the date of purchase, and more than two years after the beginning of the offering period, with a tax-qualified (Section 423) ESPP you'll 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. However, with a decreasing stock price, when you sell the shares at a loss you have no ordinary income, just a capital loss. Only in that situation, with all capital loss, will the cost basis on Form 1099-B be correct and not need an adjustment.

5. Using the wrong price when there is no lookback. If your company eliminated the lookback for your ESPP, the actual discount for the purchase and for tax purposes will often differ with a qualifying disposition, adding to the potential for tax-return mistakes. Even with an ESPP that has no lookback, the purchase price discount for the taxes is still computed from the price on the first day of the offering period and not on the purchase date, as a related FAQ at myStockOptions.com explains.

For five further crucial tips on tax-return reporting with ESPPs, see the full FAQ about this topic in the Tax Center at myStockOptions.com. In addition, see other FAQs for the biggest tax-return blunders to avoid with stock options, restricted stock and RSUs, and stock appreciation rights. The Tax Center also has FAQs with annotated diagrams showing the tax-return reporting for sales of shares acquired from equity compensation.

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Register For Our Financial-Planning Conference

We are preparing to hold our first-ever conference, a one-day event: Financial Planning for Public Company Executives & Directors (Monday, June 18, 2018). Taking place in the Boston area, this is a must-attend national conference for financial, tax, and legal advisors working with or wanting to counsel executives, directors, and high-net-worth employees. We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:

• trends of importance to advisors
• tax, estate, and SEC-related planning challenges
• methods for attracting and advising high-net-worth clients
• case studies and other examples of successful planning strategies

CE credits will be available! Register at the conference website or contact us for more information (617-734-1979, [email protected]).

Taxation Animation: Fun Videos At myStockOptions Can Help Prevent Mistakes On Tax Returns

Reporting stock sales on your tax return has not gotten any easier (or more exciting) this year. However, if there's a way to make learning about accurate tax-return reporting less tedious, we'll try it. In the Tax Center at myStockOptions.com, two animated videos give practical guidance about the reporting of company stock sales on tax returns in an engaging style. The covered topics include IRS Form 1099-B and the cost basis of shares acquired from equity comp, along with the reporting on IRS Form 8949 and Schedule D. These videos offer a quick way to learn the basics of these important points and prevent expensive mistakes on tax returns.

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

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

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

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

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

Please try our videos! They're informative, and each is just eight minutes long.

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

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Register For Our Financial-Planning Conference

We are preparing to hold our first-ever conference, a one-day event: Financial Planning for Public Company Executives & Directors (Monday, June 18, 2018). Taking place in the Boston area, this is a must-attend national conference for financial, tax, and legal advisors working with or wanting to counsel executives, directors, and high-net-worth employees. We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:

• trends of importance to advisors
• tax, estate, and SEC-related planning challenges
• methods for attracting and advising high-net-worth clients
• case studies and other examples of successful planning strategies

CE credits will be available! Register at the conference website or contact us for more information (617-734-1979, [email protected]). Special discount price for early-bird registration through April 1.

Restricted Stock/RSUs And Tax Returns: Eight Costly Mistakes To Avoid

"April is the cruellest month," wrote the poet T.S. Eliot. It certainly can feel that way if you have not yet filed your federal tax return as the IRS deadline in April approaches—and especially so if you are daunted by the complexity of the tax rules that apply to stock compensation.

Special issues on tax returns arise with restricted stock and restricted stock units (RSUs). Mistakes can be painful not only because they can cause you to overpay your taxes but also because they may draw unwanted attention from IRS auditors. (Ouch, right?) Below is a brief review of the necessary tax documents and forms, followed by eight big tax-return mistakes to avoid with restricted stock and RSUs.

Restricted Stock And RSUs: Crucial Tax-Return Documents And Forms

When restricted stock vests or RSU shares are delivered, the full value of the shares at vesting is reported on your Form W-2. If you are not an employee, this income appears on Form 1099-MISC. Employees include this value on tax returns as part of salary/compensation income on Line 7 of Form 1040. It's the same for restricted stock units, as long as all the shares are delivered at vesting (see an FAQ on RSUs with deferred delivery of shares).

For restricted stock that vests over a number of years (e.g. 25% per year), you realize and report W-2 income with each vesting slice, not when the full grant is vested. One exception: if you made a Section 83(b) election (unavailable with RSUs) to pay taxes on the full value of the restricted stock at grant, you do not then report income again for the value of the shares at vesting.

If you sold stock during the tax year, you must file with your tax return IRS Form 8949 along with Schedule D, using what your brokerage firm reports to you on IRS Form 1099-B. In most situations, the cost-basis information on Form 1099-B for stock sales from equity compensation cannot be used "as is" for accurate tax-return reporting. If you do not understand the rules, you will overpay taxes (see a related FAQ).

Eight Big Mistakes To Avoid With Restricted Stock And RSUs

Most of the potential mishaps, presented below, concern the reporting of stock sales on Form 8949 and Schedule D.

1. After selling any or all of the shares at vesting, you still need to report this sale on Form 8949 and Schedule D even though you are also including it as part of your compensation income. You may even have some small gains or losses, depending on how your company calculates the stock value at vesting and any commissions and fees for the stock sale. (For an annotated example of how to report the restricted stock sale on these forms, see the related FAQ.)

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, the IRS 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 notice for the taxes due.

2. Even though you never purchased the stock, your tax basis for reporting the stock sale in column (e) on Form 8949 is the amount of compensation income at vesting that appeared on your W-2 (you already reported it on your tax return). If you made a Section 83(b) election (not available for RSUs), the basis amount is the value at grant on your W-2. Do not assume that, because you did not pay any money to purchase the stock or exercise anything, your tax basis is zero. For the cost basis, Box 1e of your 1099-B may be blank (or show $0) only because brokers are not required to report the cost basis for noncovered securities, such as restricted stock and RSUs (some brokers may report the basis on the 1099-B that you receive but not on what they report to the IRS). Otherwise, you will pay double tax on the value of the shares at vesting. See a related FAQ with annotated diagrams of Form 8949 and Schedule D that show how you report stock sales after you have held the stock at vesting.

3. 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. Wrongly thinking it was left out may prompt you to erroneously report the income on your Form 1040 in the line for "Other income" (Line 21 on the 2017 form). Doing that would cause the income to be taxed twice as ordinary income. You use Line 21 only when your company mistakenly omits the income received at vesting from your W-2 or 1099-MISC.

4. If you surrendered or sold shares at vesting to pay the withholding tax (see our FAQ on withholding for restricted stock), you want to report any actual market sale of shares on your Form 8949. For a share surrender in which you receive only the net after-tax shares in your account, speak with your own tax advisor about the need to report this (see our related FAQ on the issue). Alternatively, if you sold only some of the shares (e.g. for taxes), you don't want to report on your Form 8949 the cost basis for all the shares vested. This would result in a much larger tax basis and a capital loss for these shares sold.

Alert: When you later sell the remaining shares in your grant, remember to exclude from your Form 8949 at that time the shares used earlier to withhold taxes (i.e. do not use the full number of granted shares). Otherwise you'll report more shares than you sold, as explained in a related FAQ.

To read four other crucial tips on tax-return reporting involving restricted stock and RSUs, see the full FAQ about this topic on myStockOptions.com. Also, see other FAQs for the biggest tax-return blunders to avoid with stock options, employee stock purchase plans, or stock appreciation rights.

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Register For Our Financial-Planning Conference

We are preparing to hold our first-ever conference, a one-day event: Financial Planning for Public Company Executives & Directors (Monday, June 18, 2018). Taking place in the Boston area, this is a must-attend national conference for financial, tax, and legal advisors working with or wanting to counsel executives, directors, and high-net-worth employees. We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:

• trends of importance to advisors
• tax, estate, and SEC-related planning challenges
• methods for attracting and advising high-net-worth clients
• case studies and other examples of successful planning strategies

CE credits will be available! Register at the conference website or contact us for more information (617-734-1979, [email protected]). Special discount price for early-bird registration through April 1.

Test Your Knowledge Of Stock Comp Issues On Tax Returns (Before It's Too Late)

Mistakes on federal tax returns? Ouch! Those really hurt. However, mistakes in the fun, free quizzes at myStockOptions are completely painless (we promise).

That is a good reason to take our tax-return quiz, which tests your understanding of stock compensation issues on tax returns. Unlike errors in IRS filings, wrong quiz answers incur no penalty or audit, and links to related content in the answer key immediately present reliable reading to fill any gaps in your knowledge.

• If you sold stock during the calendar year, which tax forms must you file with your IRS Form 1040 tax return to report the sale?
• What is the cost basis of stock that has been sold?
• What is a covered security for the purposes of cost-basis reporting on Form 1099-B?
• In the cost basis on Form 1099-B, what does the IRS prohibit brokers from including?
• If the cost basis reported on Form 1099-B is too low or is omitted, what steps should be taken on Form 8949?
• How is a sell-to-cover stock option exercise reported on federal tax returns?

If you don't know the answers to these questions, we recommend that you try our quiz and use it as a study guide. (If you do know the answers, come on over and test your smarts.) For our full range of content on tax returns, see our Tax Center.

All 16 of the short quizzes at myStockOptions.com are available free (companies can license and customize them for their stock plan participants). They are separate from our Learning Center, which has in-depth self-study courses and exams that offer:

• 30 continuing-education credits for CEPs, 100% of the total requirement
• 15 continuing-education credits for CFPs, 50% of the total requirement
• 15 continuing-education credits for CPWAs and CIMAs (37.5% of the total requirement)

Our quizzes are also part of our growing body of interactive and multimedia content, which includes podcasts and videos.

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Register For Our Financial-Planning Conference

We are preparing to hold our first-ever conference, a one-day event: Financial Planning for Public Company Executives & Directors (Monday, June 18, 2018). Taking place in the Boston area, this is a must-attend national conference for financial, tax, and legal advisors working with or wanting to counsel executives, directors, and high-net-worth employees. We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:

• trends of importance to advisors
• tax, estate, and SEC-related planning challenges
• methods for attracting and advising high-net-worth clients
• case studies and other examples of successful planning strategies

CE credits will be available! Register at the conference website or contact us for more information (617-734-1979, [email protected]). Special discount price for early-bird registration through April 1.

Reporting Stock Sales On Your Tax Return? Take The Pain Out Of Your Gain With The myStockOptions Tax Center

If you sold shares acquired from stock compensation in 2017, we hope you enjoyed a decent gain. As they say, however, no gain comes without pain. Now you must report the sale on Form 8949 and Schedule D of your IRS Form 1040 tax return. Amid the complexity of the tax rules, especially those pertaining to the cost basis of sold shares, it is all too easy to make expensive mistakes. The last thing taxpayers want is to pay too much tax or incur IRS penalties.

To help employees and their tax advisors, the Tax Center at myStockOptions.com offers clear, reliable information, guidance, and illustrations explaining how to report income from stock compensation and stock sales on federal tax returns for 2017 filed in 2018.

Alert: The Tax Cuts & Jobs Act, the tax-reform legislation that took effect in 2018, does not affect 2017 tax returns. For your future tax planning, a special FAQ at myStockOptions explains the new law's impact on stock compensation.

Tax Center At myStockOptions.com: All The Tax-Return Answers

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

• Core articles and FAQs spell out the most common mistakes people make with stock grants on their tax returns. Taxpayers, their financial advisors, and their accountants can quickly run through these to be sure they submit error-free returns. A special FAQ presents the top 10 questions that taxpayers should ask about the reporting of stock sales on their tax returns
• The reporting of stock sales is made clear with annotated how-to diagrams of IRS tax-return forms.
• Diagrams of Form W-2, Form 3922 (for employee stock purchase plans), and Form 3921 (for incentive stock options) show how companies report equity compensation income to employees.
• Animated videos include a succinct tutorial on key IRS tax forms related to stock-sale reporting and a video guide to avoiding costly mistakes that can lead to the overpayment of taxes.
• Engaging podcasts convey tips for tax returns.
• A fun interactive quiz on tax-return topics lets users test their reporting knowledge in a painless way, before they file their returns, and links to related content from the answer key.

Figuring Out Form 1099-B

For stock-sale reporting, the complexity starts with IRS Form 1099-B. Every February, each brokerage firm sends Form 1099-B, or the firm's equivalent substitute statement, to clients who sold shares during the preceding tax year. The information on the 1099-B is also reported to the IRS. The required stock-sale information on Form 1099-B was expanded a few years ago and now includes not only the gross proceeds from stock sales but also their cost basis (sometimes called the tax basis), the date when the shares were acquired, and whether gains or losses were short-term or long-term.

Form 1099-B is essential for completing Form 8949 and Schedule D. Form 8949 is where you list the details of each stock sale, using the information on Form 1099-B. Schedule D aggregates the column totals from Form 8949 to report total long-term and short-term capital gains and losses. However, the cost-basis information in Box 1e of Form 1099-B may be too low, or the box may be blank. Also, no basis is reported for restricted stock or restricted stock units.

In the Tax Center at myStockOptions.com, a cluster of content relates the background issues, explains how to understand Form 1099-B after selling shares from stock compensation or an ESPP, and shows how to avoid mistakes with the cost basis that can lead to the overpayment of taxes:

• Article: Avoid Overpaying Tax On Stock Sales: Understand Forms 1099-B And 8949 For Tax-Return Reporting
• FAQ: How have IRS Form 1099-B and cost-basis reporting changed for sales of stock acquired from my stock options, restricted stock, or ESPP? What do I need to do differently because of the changes?
• FAQ: What if the wrong cost basis is reported on my 1099-B? How do I report the right cost basis on Form 8949 of my tax return?
• Video: Tax-Return Reporting Of Company Stock Sales: How To Avoid Overpaying Taxes
• Video: Tax Return Forms & Reporting Rules For Stock Sales
• Podcast: What's New For Reporting Stock Sales On Your Tax Return

Putting It All Together On Your Tax Return

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

The Tax Center also has in-depth articles on general tax-return topics. These include:

• 12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs
• Restricted Stock & RSUs: 10 Tax-Return Mistakes To Avoid
• NQSOs: Tax Return Tips And Traps
• ISOs: Tax Return Tips And Traps

Resources For Stock Plan Participants And Companies

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Companies can help their stock plan participants make the most of their equity compensation by giving them resources for avoiding expensive mistakes on tax returns.

The excellence of our resources is attested by recent prominent coverage by PLANSPONSOR and by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or [email protected]).

Tax Season 2018: Quick Take On What's New For Stock Comp

Once again, the season of tax returns returns (if you'll pardon the expression). At myStockOptions.com, this is one of our busiest times of the year, not only for website traffic but also for editorial updates in our Tax Center. We work hard to stay on top of new developments in the tax-return reporting for stock compensation and company shares, along with tricky points to watch out for in the related IRS forms.

Alert: The Tax Cuts & Jobs Act has no impact on 2017 taxes or 2017 tax returns filed in 2018.

This blog commentary provides an overview of topics to keep in mind as you prepare to file your 2016 federal tax return in 2017.

Be Aware Of Tax Changes In The Past Few Years

Developments over the past few years, such as changes in tax rates and in amounts that are indexed yearly for inflation, continue to affect tax-return reporting for 2017. The following paragraphs provide a quick take on some issues to be aware of when filing your 2017 federal tax return in 2018.

If you received a grant of restricted stock this year and made a Section 83(b) election to be taxed on the value at grant (not permitted for RSUs), under rules the IRS finalized in 2016 you no longer need to attach the paper election to your tax return. See our related FAQ for more details.

Under tax-rate hikes that came into effect in 2013, high-income taxpayers have increased tax rates on ordinary income, capital gains, and dividends, along with the return of phaseouts on personal exemptions and itemized deductions. The reduction in the top tax rate (and other bracket rates) and the end of the phaseouts and personal exemptions in 2018 under the Tax Cuts & Jobs Act do not affect your tax return for 2017 income.

The alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate are indexed for inflation. These are important for people who have incentive stock options. While the rules didn't change for tax year 2017, from 2018 onward it is much less likely that you will trigger the AMT, given the higher exemption amounts and the higher income point where the phaseout starts. (See our related FAQ.)

Following the Supreme Court's decision in Obergefell v. Hodges (2015), which legalized same-sex marriage throughout the United States, all same-sex spouses must now use married filing status not just for their federal tax returns but also for their state tax returns (whether married filing jointly or married filing separately). Before Obergefell v. Hodges, same-sex spouses who were married in a state where they did not live had to file as singles if their state of tax residence did not recognize their marriage. As filing under married joint status will often result in more tax than filing as singles will, they probably have little incentive to amend past tax returns from single to joint status. For more about the equity compensation and tax impact of the Supreme Court's decisions on same-sex marriage, see our related FAQ.

Important Recent Changes That Affect Stock Compensation Reporting

The 2017 version of IRS Form 1099-B, which brokers issue for stock sales made during the tax year, closely resembles the version for the 2016 tax year. However, the 2014 version introduced some major changes that you should continue to keep in mind when reviewing your 1099-B and the substitute statement that your broker provides for stock sales in 2017 (see the discussion below and our related FAQ).

• Among the recent changes in Form 1099-B: The all-important cost-basis information is now in Box 1e instead of the previous Box 3. Also, for grants made in 2014 and later years, brokers are prohibited from including equity compensation income (which appears on Form W-2) in the cost basis reported on Form 1099-B.
• IRS Form 8949 and Schedule D, which you complete by using information on Form 1099-B if you sold company stock or other securities, were revised a few years ago. However, the versions of the forms for the 2017 tax year, to be filed in 2018, are identical to last year's versions. The columns on Form 8949 now match up with the boxes on Form 1099-B.
• If the basis reported to the IRS is correct on Form 1099-B and does not need any adjustment, the IRS now lets you skip Form 8949 and report the sale only on Schedule D. Usually, however, with stock compensation either the reported basis is too low or the box on the form is blank (see our related FAQ). Even if the basis has been correctly reported, it may be simpler for your recordkeeping to list all of your securities sales together on Form 8949.

Alert: See whether your broker has any supplemental information and tax guides that can help you understand the cost-basis reporting and adjustments needed on Form 8949.

Resources For Tax Season

For guidance on the tax-return reporting for sales of shares acquired through stock compensation, including annotated diagrams of Form 8949 and Schedule D, see the section Reporting Company Stock Sales in our Tax Center. Elsewhere in the Tax Center, another section gathers our popular annotated diagrams of Form W-2. These can help you make sense of Form W-2 (which companies issue in January) when the reporting on the form includes income you received from stock options, restricted stock/RSUs, or employee stock purchase plans.

If you exercised ISOs last year, your company will send you Form 3921. If you purchased shares through an ESPP during the year, your company will send you Form 3922. Employers send these forms in January. We have articles and FAQs with annotated diagrams of Form 3921 and Form 3922 that can help you understand these documents.

If you participate in a nonqualified deferred compensation (NQDC) plan, see our sibling website myNQDC.com for educational guidance on tax-return reporting.

Tax Reporting For Stock Comp: Understanding Form W-2, Form 3922, And Form 3921

January is settling into its long, cold reign. Along with snowflakes, important tax-return documents are in the air for people who received income from equity compensation last year. These include Form W-2 for employees, Form 3922 (for those who purchased ESPP shares), and Form 3921 (for those who exercised incentive stock options).

For employees with stock compensation, tax-return paperwork and the information it contains can be confusing and hard to decipher. This blog commentary provides an overview of the reporting you need to understand.

Alert: The tax-reform legislation adopted in December 2017 does not affect 2017 taxes, 2017 IRS forms, or 2017 federal tax returns filed in 2018. (Breathe.)

Making Sense Of Form W-2 When Stock Compensation Is Reported

Employees who had income from stock compensation or an employee stock purchase plan in 2017 must understand where that income is reported on Form W-2 so that they can complete their tax returns properly. In the Tax Center at myStockOptions.com, we have a section of FAQs about Form W-2 reporting for stock compensation. Each one includes an annotated diagram of Form W-2 that clearly interprets this sometimes cryptic document.

Restricted Stock, RSUs, Performance Shares

The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types, assuming there is no election to defer share delivery. Income is included in the following places:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (to income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)

To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs, including annotated diagrams, in the Tax Center.

Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.

Stock Options

If you exercised nonqualified stock options last year, the income you recognized at exercise will be reported on your W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:

• Box 1: Wages, tips, and other compensation
• Box 3: Social Security wages (up to the income ceiling)
• Box 5: Medicare wages and tips
• Box 16: State wages, tips, etc. (if applicable)
• Box 18: Local wages, tips, etc. (if applicable)
• Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights, with the exception that Code V is not used.)

With incentive stock options, the spread value appears on the W-2 only when you make what is technically called a disqualifying disposition, i.e. when you sell or gift the stock before you have met the required holding periods of one year from exercise and two years from grant. In that case, the income appears on the W-2 as compensation income. Unlike with NQSOs, your company does not withhold federal taxes on ISO exercises and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions. For the details of W-2 reporting for ISOs in this situation, see our FAQ on this topic in the Tax Center.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions.com.

Form 3922 For ESPPs And Form 3921 For ISOs

Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2017, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you will receive from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic).

Alert: In 2016, the amount of the IRS penalty doubled for companies that file information returns late or fail to distribute the employee statements.

For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.

While Forms 3922 and 3921 may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, they mean that accurate and timely tax-return reporting is more important than ever.

Annotated Diagrams Of Forms 3922 And 3921

To help companies and participants understand these forms and the related tax rules, myStockOptions.com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. You will find this content in the ESPP and ISO tax sections of both myStockOptions.com and the Knowledge Centers that we license to companies and stock plan service providers.

Each ESPP purchase is reported on a separate Form 3922, which presents the following information:

• date of grant (usually the beginning of the offering period)
• stock FMV on the date of grant
• purchase price per share
• price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
• purchase date
• stock FMV on the purchase date
• date of transfer of legal title
• number of shares for which legal title is transferred

Each ISO exercise is reported on a separate Form 3921, which shows the following details:

• grant date
• exercise price per share
• exercise date
• the stock FMV on the exercise date
• number of shares exercised

Sell Shares In 2017? The Fun Is Just Beginning

If you sold shares from stock compensation or an ESPP last year, you will need guidance to report the sale proceeds on your tax return. Failing to report gains, or doing so incorrectly, is a costly error.

Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting. These FAQs clearly explain how the information on Forms W-2, 3922, and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return. They also help you interpret the often confusing Form 1099-B reporting that you receive from your broker for stock sales.

Resources For Stock Plan Participants And Companies

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns.

The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations."

Please contact us for licensing details (617-734-1979 or [email protected]).