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Alert (Jan. 12, 2012): Tax Season Looms With New Forms & Reporting

For people who sold shares in 2011, major changes in tax reporting and filing are taking effect this tax season. This alert summarizes the changes and their impact, along with an important update on Social Security withholding for 2012. For the full details, see the Tax Center at myStockOptions.com, including the section Reporting Company Stock Sales. See also the full list of recent additions and updates throughout the website.

First, Meet The Revised IRS Form 1099-B

Sent by brokers before mid-February, IRS Form 1099-B, or the broker's equivalent statement, now includes more information than it used to. Starting this tax season, Form 1099-B shows not only the gross proceeds from stock sales but also their cost basis (also called the "tax basis"), the date when the shares were acquired, and whether gains or losses were short-term or long-term.

For people who sold shares acquired through equity compensation, these stock sales carry an extra twist in their cost basis. In fact, cost-basis reporting is now more complex, confusing, and vulnerable to errors. If you are not aware of the reporting rules, the resulting confusion may lead you to overpay taxes. A thorough new article and FAQ at myStockOptions.com explain the background, how to understand Form 1099-B if you sold shares from stock compensation or an ESPP, and how to avoid mistakes with the cost basis that can lead to overpayment of taxes.

Second, Meet Schedule D's New Best Friend: IRS Form 8949

The revision of Form 1099-B is not the only IRS curveball this tax season. The changes in the 1099-B information also required a complete revamp of the tax-return forms used to report stock sales. To report a sale of shares on your tax return, you must now complete the new IRS Form 8949 along with Schedule D, which has significantly changed upon the introduction of Form 8949. You submit both with your Form 1040 tax return. (For a quick rundown of the changes, listen to our podcast on the topic.)

The new Form 8949 is where you list the details of each stock sale, using the information on Form 1099-B, while Schedule D now simply aggregates the column totals from this form to report your total long-term and short-term capital gains and losses. However, the cost-basis information in Box 3 of Form 1099-B may be too low, or the box may be blank. This is because the new rules for cost-basis reporting are mandatory only for stock acquired in 2011 and later, and brokers will not be required to include the compensation part of the basis until 2013. (See our article on this topic and a new FAQ on the compensation part of the tax basis.) Additionally, no basis is reported for restricted stock and RSUs.

Sound confusing? It is. Fortunately, myStockOptions.com is always here to help. Our special section Reporting Company Stock Sales presents FAQs with 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 3 of Form 1099-B is accurate, too low, or omitted.

All of our tax-season content, including our popular annotated tax forms, is available for licensing. For details, please send inquiries to info@mystockoptions.com.

Extension Of 4.2% Social Security Rate

While the 2012 wage base for Social Security tax is set at $110,100, uncertainty remains about the rate for the whole of 2012. In 2011, the withholding rate for Social Security tax was temporarily reduced from the usual 6.2% to 4.2%. In late December, Congress extended this payroll tax cut, but only for the first two months of 2012.

On the possibility that the 2% cut will not be extended beyond February, it's easy to think that if you exercise nonqualified stock options before March you will save some money by getting the lower 4.2% Social Security rate rather than the normal 6.2% rate. For similar reasons, you may be considering a Section 83(b) election to be taxed at grant on restricted stock that will be awarded in early February.

However, as a financial-planning strategy, this will not work the way you thought. You have not found a loophole! If the 4.2% rate is not extended for the entire year and you receive compensation income (e.g. salary, bonus, stock compensation) in January and February that exceeds $18,350 (a sixth of the Social Security wage base of $110,100), you face some type of recapture for the 2% lower rate. Most likely, the Form 1040 tax return for 2012 (filed in 2013) would include a line to handle the recapture, which would not be subject to any tax credits or deductions.