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Preventing Tax Errors:
myStockOptions.com Newsletter No. 52

IN THIS ISSUE

Stock-sale reporting on tax returns changes again
What if the wrong cost basis is reported on Form 1099-B?
Articles on tax return topics
Video and podcasts on tax return reporting in 2013
Important tax changes starting in 2013
France: big tax changes affect stock compensation


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EDITOR'S WELCOME

This tax return season has more potential than ever for confusion, uncertainty, and expensive mistakes. Anybody who sold stock during 2012 must be sure to understand all the recent changes in the related IRS forms. These include revisions to Form 1099-B and Form 8949, which always raise many questions, particularly about how to report the cost basis for stock sales.

For people with stock comp (and their tax professionals), the clear, concise, and easy-to-read return content of myStockOptions.com can help. The Tax Center at myStockOptions.com shows exactly how to report stock compensation and stock sales on tax returns, including the annotated diagrams of IRS forms in the section Reporting Company Stock Sales. It's a respected independent source you can trust for tax guidance, as recently featured in Plansponsor.

This newsletter summarizes the changes and their impact, and it also provides a general introduction to some of our perennially popular tax return content. Don't want to wait for our quarterly newsletter updates? The myStockOptions.com Blog is the best way to stay on top of equity compensation news and the latest developments at our website. You can also follow us on Twitter and Facebook.

We appreciate your interest in myStockOptions.com. If you do not yet subscribe to Premium or Pro Membership, giving full access to our content and tools, tax season is a great time to upgrade. All of our content and tools are also available for licensing.

—Bruce Brumberg (Editor-in-Chief)


What are the big changes with reporting stock sales on my tax return? Why have these changes occurred?

Major changes in the tax reporting and filing for stock sales became effective in 2012 (i.e. starting with stock sales made in 2011). The revised reporting and filing rules now apply every year. For this tax return season, the IRS has made important modifications in the key forms.

The Revised IRS Form 1099-B

Sent by brokers by mid-February, IRS Form 1099-B, or the broker's equivalent substitute statement, now includes not only the gross proceeds from stock sales but also, at least for covered securities:

  • their cost basis (also called the tax basis)
  • the date when the shares were acquired
  • whether gains or losses were short-term or long-term

The information on Form 1099-B is sent both to you and to the IRS, though your broker may give you more details than it provides to the IRS. While the 1099-B for the 2012 tax year is similar to the 2011 version, there are some differences, including a checkbox indicating whether or not the basis was reported to the IRS.

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. An article and an FAQ on this website 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.

IRS Form 8949, Schedule D's New Best Friend

The revision of Form 1099-B 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 significantly changed upon the introduction of Form 8949. You submit both with your Form 1040 tax return.

Introduced for use in 2012 (for 2011 tax returns), Form 8949 was revised for 2013 (for 2012 tax returns) by the shifting of a few columns. The all-important column for reporting the cost basis is now column (e). The prior column (b) for the code that explains any adjustment was moved next to column (g), where you put any adjustment in the gain/loss. In addition, a new column (h) was added for the total gain/loss for each listed transaction.

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 overall long-term and short-term capital gains and losses. However, the cost-basis information sent to the IRS in Box 3 of Form 1099-B may be too low, or the box may be blank. Depending on your situation, this may be the case for any of several reasons:

  • The new rules for cost-basis reporting are mandatory only for stock acquired in 2011 and later, so the basis of stock acquired earlier may not be reported.
  • Brokers are not required to include the compensation part of the basis in their reporting to the IRS. The latest IRS proposed regulations indicate that brokers may not have to report the compensation portion at all in the foreseeable future.
  • No basis is reported for restricted stock and RSUs, as they are not acquired for cash and are considered noncovered securities.

See our FAQ on how to handle Form 8949 when the cost basis on the 1099-B is wrong or omitted, and see also the new FAQ on the compensation/W-2 income part of the tax basis.

Alert: It is up to you—not your company, your broker, or the IRS—to make any necessary modifications in your Form 8949. The special section Reporting Company Stock Sales on this site 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 reported to the IRS on Form 1099-B is accurate, too low, or omitted.

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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?

The new Form 8949 is where you now list the details of each stock sale, while the revised Schedule D is where you now merely aggregate the column totals from Form 8949 to report your total long-term and short-term gains and losses. From our interpretation of the forms, along with the instructions for Form 8949 and the instructions for the revised Schedule D, myStockOptions.com recommends the following steps to avoid overpaying taxes if the wrong cost basis was reported to the IRS on Form 1099-B.

While you still report that number from the 1099-B in column (e), you can avoid overpaying your taxes by taking the following steps:

1. Start with Part 1 on Form 8949 for short-term capital gains/losses or Part II for long-term capital gains/losses. Box 1c on Form 1099-B (or the reformatted substitute statement from your broker) will indicate which you have (long or short). Towards the top of Form 8949, check either Box (A) or Box (B) according to whether a basis for the stock you sold was reported at all to the IRS.

2. Find the column entitled Adjustments to gain or loss, which is column (g) in both forms. On Form 8949, enter in this column the stock compensation that was not included in the cost basis (Box 3) reported to the IRS on Form 1099-B. This 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. In addition, you need to add a Code in column (f) that explains why there is an adjustment in column (g). You insert...

For the rest of step three, plus steps four and five, which include what to do if no cost basis was reported to the IRS, see the full FAQ on myStockOptions.com.

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Articles On Tax Returns With Stock Compensation

The list below summarizes our exclusive articles on crucial tax return topics relating to stock compensation.

How To Report Sales Of Company Stock
Learn how to report your sales of company stock on Form 8949 and Schedule D of IRS Form 1040. Our comprehensive guide to tax return reporting features carefully annotated diagrams of the IRS forms. Covered topics include sales of stock from nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, and stock appreciation rights.

The Revised Form 1099-B & New Form 8949 For Reporting Stock Sales On Your Tax Return: How To Avoid Paying Too Much Tax
Cost-basis reporting, both for your broker on Form 1099-B and for you on your tax return, 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 pay more taxes than you have to. This article explains how to avoid mistakes.

Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2012
Puzzled by your W-2 or 1099-B? Don't know how and where to report sales of company stock on your tax return? Learn insightful tips to avoid errors that can prove costly!

Restricted Stock & RSUs: What You Must Know To Avoid Tax Return Mistakes In 2012
Restricted stock or restricted stock units (RSUs), whether granted along with or instead of stock options, bring their own special issues to your tax return.

NQSOs: Tax Return Tips And Traps
Whether you complete your own tax return or just want to review what your tax preparer did, it's important to understand basic reporting requirements for nonqualified stock options. Learn what you need to report on your tax return at each stage of the NQSO life cycle.

ISOs: Tax Return Tips And Traps
Incentive stock options bring special complexities to tax returns, especially when the alternative minimum tax is involved.

Stock Option Financial Planning After Your Tax Return Is Filed And At Year-End (Part 1)
The time right after you have completed your tax return is ideal for big-picture financial planning. You can more accurately project your income and likely tax situation for the remainder of this year and the next, including AMT risk and capital-loss carry-forwards, to develop your strategy.

In addition to these articles, myStockOptions.com has numerous FAQs on other tax return topics, including a helpful FAQ on a range of ESPP tax-return mistakes.

AdvisorFind Directory
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Stock compensation raises many questions.

  • When should you exercise stock options?
  • How can you minimize your tax bill?
  • Should you sell or hold restricted stock at vesting?
  • How can you diversify your company stock holdings?
  • How do you negotiate for stock compensation in your employment agreement?

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Got Eight Minutes? Try Our Engaging Video And Podcasts On Tax Return Mistakes To Avoid In 2013

If there's a way to make learning about tax returns fun, myStockOptions.com will try it. In the Tax Center, we have published a quick-paced 8-minute video presentation on the expanded IRS Form 1099-B and cost basis reporting, the new IRS Form 8949, and the revised Schedule D. It's a painless way to learn these important developments and prevent expensive mistakes on tax returns during tax season.

In a concise, engaging overview, our editor-in-chief Bruce Brumberg will inform you about:

  • the expanded 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
  • the new 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 the revised Schedule D

Try it! It's fun, it's informative, and it's just eight minutes long. The video can also be licensed and customized to fit your stock plans, as can any content on myStockOptions.com.

On the go? Can't stream the video? You can still download our podcasts on tax return topics and listen to them at any time.

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Important Tax Changes Starting In 2013

For income in 2013 and beyond, tax changes under the American Taxpayer Relief Act now apply to income from stock compensation, capital gains upon the sale of shares, and dividends. For people with incentive stock options, the alternative minimum tax (AMT) has also changed in three dramatic ways. Additionally, under the Affordable Care Act, increases in Medicare tax for high earners are now effective. The tax-planning content and tools at myStockOptions.com are fully updated for the changes, detailed below, that affect stock compensation.

  • The top federal withholding rate on supplemental income rose to 39.6%. Supplemental income, such as stock compensation, is subject to one of two flat rates that are linked to income tax rates. For aggregate supplemental wage payments totaling up to $1 million during the year, the rate is 25% (the rate of the third income tax bracket). For aggregate supplemental wage payments that exceed the level of $1 million in a calendar year, the rate is now 39.6% (the new rate of the highest income tax bracket).
  • The Social Security rate returned to 6.2% after a temporary cut to 4.2% in 2011 and 2012, as the new tax law did not extend the reduction in payroll tax. Social Security tax applies up to a certain amount of yearly income ($113,700 in 2013) and not to yearly income above that threshold.
  • The capital gains tax rate that applies to the proceeds from a stock sale increased to 20% for single filers with yearly taxable income of more than $400,000 and for married joint filers with yearly taxable income of more than $450,000. (For taxpayers whose yearly taxable income is below these thresholds, the top rate of capital gains tax remains 15%.)
  • Similarly, the tax rate on dividends grew to 20% for single filers whose yearly taxable income is over $400,000 and for married joint filers whose yearly taxable income is over $450,000. This applies to any qualified dividends received on company stock you own or on unvested restricted stock for which you have filed a Section 83(b) election.
  • For people with incentive stock options, the income exemption amounts (commonly known as the "AMT patch") for calculating the alternative minimum tax in 2012 are $50,600 for single filers and $78,750 for married joint filers. Additionally, the new tax law indexed the annual AMT income exemption amounts permanently for inflation and made other important changes. The exemption amounts for 2013 are $51,900 and $80,800. The new tax legislation did not extend the refundable AMT credit that was available for the tax years 2007 through 2012.
  • For qualified small business stock issued between now and the end of 2013, 100% of the gains will be excludable from capital gains tax (0% rate) and omitted from the AMT calculation. The provision was made retroactive to September 27, 2010. The exclusion helps anyone buying stock in a small privately held company, including stock from an option exercise or restricted stock vesting.
  • Separately from the American Taxpayer Relief Act, in 2012 the Affordable Care Act increased the Medicare tax rate on compensation income for high-income taxpayers from 1.45% to 2.35%, and a new 3.8% Medicare surtax now applies to investment income, such as capital gains from stock sales. Both of these tax changes became effective on January 1, 2013.

Related FAQs at myStockOptions.com show the effect of these changes on the tax treatment and withholding rates for various types of equity awards.

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Big Tax Changes In France Affect Stock Compensation

The election of a new government in France last year has had a major impact on the country's tax landscape, and stock compensation has not escaped. Enacted on December 30, 2012, the French Finance Act of 2013 significantly changed the taxation of qualified stock options and RSUs granted on or after September 28, 2012. For these grants, income received at exercise/vesting is taxed at progressive rates of up to 45%, though the payment of this tax is deferred until the sale of the shares. In addition to the payment of income tax at sale, however, any appreciation in share value after exercise is also subject to progressive income tax rates up to the maximum of 45% plus additional social taxes of 15.5%. This tax treatment is effective from 2013 onward for all sales, regardless of the date when the underlying equity award was granted or the date when the shares were acquired.

However, holding the shares after acquisition can help reduce the capital gains tax at sale. For capital gains on shares that have been held for two years or longer, a progressive tax rebate is available on the following scale:

  • 20% rebate for shares held between 2 and 4 years
  • 30% rebate for shares held between 4 and 6 years
  • 40% rebate for shares held longer than 6 years

Note that the rebate applies only to the income tax portion of the tax on capital gains. It does not apply to the social taxes.

For more on the complex taxation of stock comp in France, and on the taxation of equity awards in over 30 other countries around the world, see the Global Tax Guide at myStockOptions.com.

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