Biggest tax mistakes with restricted stock and RSUs
Tax return reporting with new IRS forms for ESPPs & ISOs
Articles and podcast on tax return topics
Study reveals trends in stock grant practices


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The timely avoidance of tax-return errors now can make a huge difference later, as mistakes can lead to costly IRS penalties, or even the dreaded prospect of an IRS audit, discussed in one of our new FAQs. At, this makes our tax-season content highly popular. Below in this newsletter are brief features exemplifying the many ways can help you avoid expensive errors on tax returns that involve stock compensation. Elsewhere in the newsletter we also point you to our special articles on tax-return topics.

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Biggest Tax Return Mistakes With Restricted Stock & RSUs

The IRS has expanded its technology over the past few years and can now easily match and compare e-filed information documents, such as Forms W-2 and 1099-B, making accurate tax reporting more important than ever. The most common blunders, which can also occur with performance shares, include the following:

  • double-counting restricted stock income by mistakenly not including the vesting income (reported on Form W-2) when you report the tax basis of a stock sale on Schedule D
  • not reporting any income until the full grant is vested
  • double-counting dividend income
  • failing to report a stock sale when there is no gain over what appears on the W-2
  • reporting the cost basis as $0 because nothing was "paid" for the stock

Given that many companies require share surrender or make it the default choice for withholding, employees commonly make a related mistake: reporting at sale too many shares sold by using the full number of shares in the grant and not the net they received. When employees sell the remaining shares in their grant, they must remember to exclude from their Schedule D at that time the shares used earlier for taxes. Otherwise, if they forget that they technically "sold" stock in the share surrender, they may end up reporting on Schedule D more shares than they actually sold.

Example: You receive a grant of 10,000 shares but actually acquire only 7,500 because of the share surrender. Your W-2 reports the value of the stock when the shares were delivered at vesting. When the company stock is sold two years later, you mistakenly report the value of the 10,000 shares as the tax basis, not realizing that the 2,500 were technically "sold" at the time of vesting/share delivery to cover the taxes. Instead, you should report just the value of the 7,500 sold shares on the Schedule D.

An FAQ in the section Reporting Company Stock Sales illustrates this point with an annotated example of Schedule D.

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New IRS Forms On ESPPs And ISOs Make Accurate Tax Reporting More Important Than Ever

For ESPP purchases or ISO exercises during 2010, employees should by now have received the new IRS Form 3922 for ESPPs and Form 3921 for ISOs, or a substitute form that aggregates the same information in one place. Companies must file the forms electronically with the IRS by the end of March. (Those with fewer than 250 filings were allowed to make paper submissions before the end of February.)

For those who already understand ESPP and ISO taxation, these forms add nothing new, and they don't change tax-return reporting or timing. However, employees, their CPAs, or anyone preparing a tax return must know the following about the forms:

  • The IRS now knows more about ESPP purchases and ISO exercises than it used to, and its computers can quickly match inconsistencies between these forms and your tax return.
  • With Form 3922 for ESPPs, for example, the IRS now knows your tax basis and the calculation of ordinary income you owe when you eventually sell the ESPP shares in a qualifying disposition. The failure to report this ordinary income on your tax return is a common error, and now the IRS will have the information to catch the mistake.
  • With Form 3921 for ISOs, the IRS now has the information it needs to confirm your calculation for triggering the alternative minimum tax (AMT) when you exercise and hold the ISO stock, and it knows the tax basis at the sale of ISO shares. The ISO exercise spread is not reported on Form W-2 unless you sell the stock in a disqualifying disposition, and this new form therefore provides the IRS with information it lacked before.

Employees should not file these forms with the IRS. They should save the forms to help with their tax-return reporting after they eventually sell the shares. has published an article and FAQ exclusively dedicated to Form 3922 for ESPPs, and another article and FAQ just on Form 3921 for ISOs. These include annotated examples of the forms that "translate" IRS jargon into understandable language and show how the information applies to tax reporting.

Nonqualified Deferred Compensation:, A Complete Online Resource For Participants And Professionals

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For companies, education and communication are vital for ensuring NQDC plans work properly to motivate and retain vital executives, directors, and key employees. Companies can license our educational content and tools for websites, print materials, newsletters, and presentations.

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Articles & Podcast On Tax Returns

Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2011
Puzzled by your W-2 or a 1099-B? Don't know how and where to report sales of company stock on your tax return? Learn simple tips to avoid errors that could prove costly later!

Restricted Stock & RSUs: What You Must Know To Avoid Tax Return Mistakes In 2011
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.

How To Report Sales Of Company Stock
Learn how to report your sales of company stock on Schedule D of IRS Form 1040. Our comprehensive guide to Schedule D reporting covers 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.

Podcast: Tax Return Tips & Reporting Errors
A lively discussion with Bruce Brumberg, editor-in-chief and co-founder of, about reporting all types of stock compensation on your tax return. Learn how to avoid common (and costly!) errors that can attract unwanted IRS attention. This podcast is available free!

In addition to these features, has numerous FAQs on other tax return topics, including a helpful FAQ on a range of ESPP tax-return mistakes. Assistance in Making Timely and Informed Decisions

Maximizing the value of equity compensation holdings requires a series of timely diversification decisions over a long period of time. Research shows that most option-holders exercise their grants either when they are about to expire or when they need money. This strategy is risky because the price of one's company stock isn't always at its best at these times.

Making exercise and sell decisions that maximize the value of a stock option portfolio requires a decision framework based on more than just stock price. Here are 5 things employees with stock options need to know to determine the optimal time to take action:

  1. Their Forfeit Value: The full value (time value + in-the-money value) one leaves behind when terminating prior to retirement.
  2. How small changes in stock price can yield large incremental increases and/or decreases in grant value (the leverage effect).
  3. The stock price at which an individual's financial goal is attained.
  4. One's level of concentration in company stock and options.
  5. Their Insight Ratios: A metric quantifying the remaining theoretical potential of each grant. is a unique platform that serves equity compensation recipients, financial advisors and stock plan sponsoring companies by providing this personalized information and automated email alerts that facilitate timely and informed decisions. For more information visit:

Study Shows Growing Trend Toward Restricted Stock & Performance Shares

In its Executive Compensation Bulletin (Dec. 2010), Towers Watson used data in the firm's Long-Term Incentive (LTI) Database to uncover trends that emerged during 2010. Authors David Seitz and Christopher Colder found that since the market rebound the value of LTI grants had increased by 15% in total over the levels of 2009. The study found the following about stock compensation:

  • There has been a move away from a prevalence of stock options in the LTI mix to a more balanced LTI portfolio. In 2010, 73% of companies granted at least two forms of equity (up 10% from 2009). The average senior executive (base salary over $300,000) at a large company received an LTI portfolio of 35% restricted shares/units, 33% performance shares, and 32% stock options.
  • Restricted stock and RSUs were granted by 71% of the companies. Three quarters of them used time vesting. There was no increase in the number of companies that granted performance-vested restricted stock.
  • Almost 20% more companies used performance shares in 2010 than in 2009: 35% of these companies granted performance shares in 2010, while 23% used performance cash awards. The most common metric in these plans was revenue, followed by TSR and earnings per share.

For more studies and survey data, see our FAQs on trends in option and restricted stock/RSU grants and in ESPPs.

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