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How To Prevent Costly Tax Mistakes With Stock Compensation And Company Shares:
myStockOptions.com Newsletter No. 67 (March 2017)
|IN THIS ISSUE|
The top 10 questions to ask about reporting stock sales on tax returns
Restricted stock or RSUs: the biggest tax-return mistakes to avoid
Tax-return content: videos, articles, annotated IRS forms, and podcasts
Media praise for myStockOptions tax-season resources
Beware: IRS penalty for late filing has increased
myStockOptions Learning Center now offers 30 CE credits for CEPs
SPONSORS OF THIS ISSUE
This newsletter summarizes what's new for the 2017 tax-return season and provides an introduction to our perennially popular tax-return content.
Beware: this tax season brings more potential than ever for confusion, uncertainty, and expensive mistakes. Major changes have occurred in the tax reporting for stock sales during the past few years. These have made accurate tax-return reporting more complex and difficult for anyone who has sold shares acquired from equity compensation. Mistakes can be painful not only because they can cause you to overpay your federal taxes but also because they can draw unwanted attention from IRS auditors. If you received income from equity compensation or sold shares in 2016, you must understand the related reporting on IRS tax forms to avoid making costly errors.
The award-winning articles, FAQs, annotated diagrams, videos, and podcasts in our Tax Center can help. Key content includes:
In the newsletter below, we present two FAQs adapted from the Tax Center, a list of our exclusive content on tax returns involving stock compensation, and various other items of interest to the users of myStockOptions.com.
FREE APP! Have stock compensation? Work with stock plans? Both? Now you can keep our valuable equity comp expertise at your fingertips with our free app for iPhones, iPads, and Android smartphones: Stock Compensation Glossary, available from the App Store (for Apple devices) and from Google Play (for Android devices). Based on the popular glossary at myStockOptions.com, this handy, searchable reference guide defines almost 1,000 terms in the areas of equity compensation and executive compensation, including terms used in the related taxation, corporate accounting, and securities law.
Thank you for using myStockOptions.com. If you do not yet subscribe to Premium or Pro Membership, giving full access to our content and tools, year-end and tax-return season is a great time to upgrade. All of our content and tools are also available for licensing.
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.
—Bruce Brumberg (Editor-in-Chief)
|Two FAQs On Tax Returns Involving Stock Compensation And Company Shares|
What are the top 10 questions I should ask about the reporting of stock sales on my tax return?
If you sold shares during the tax year, you must report the sale on your tax return. Special issues arise with shares that were acquired from stock options, restricted stock, restricted stock units (RSUs), performance share grants, an employee stock purchase plan (ESPP), or stock appreciation rights.
Below are 10 questions you should ask to be sure that you report your stock sales accurately and avoid costly mistakes that attract the attention of the IRS. For the full range of tax-related articles and FAQs at myStockOptions.com, see the Tax Center.
1. Have I received IRS Form 1099-B from my broker? The reporting on Form 1099-B, which brokers often send in their own reformatted substitute statement, shows how much you received from securities sales during the prior tax year, including proceeds from shares you acquired through stock compensation. You use that amount, along with your cost basis, to calculate your gain or loss for tax purposes on IRS Form 8949 and Schedule D of your IRS Form 1040 tax return. Form 1099-B or the equivalent substitute statement is necessary for the accurate completion of your tax return.
2. What is the cost basis for calculating the gains from sold shares that I acquired from stock compensation?
3. In the cost basis I use to report sales of company stock on my tax return, what part comprises the W-2 income from stock compensation or an ESPP?
4. 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?
5. How do I actually enter the information when I report stock sales on IRS Form 8949 and Schedule D? A special section in the myStockOptions Tax Center has FAQs with examples and annotated diagrams of Form 8949 and Schedule D that show how you report sales of shares acquired from:
- nonqualified stock options
- incentive stock options
- restricted stock, RSUs, or performance share grants
- stock appreciation rights
- employee stock purchase plans
To see the next five key questions, including those on stock sales, tax-reporting forms for ESPPs and ISOs, and the alternative minimum tax, see the full FAQ in the Tax Center.
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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 have no "gain" beyond what is part of your compensation income. You may, however, have a small gain or loss, 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 another 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 on the full amount of the proceeds.
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. Otherwise, you will pay double tax on the value of the shares at vesting. 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). 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 2016 form). 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 or 1099-MISC.
4. If you surrendered or sold shares at vesting to pay the withholding tax, 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 a 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 see the next four key mistakes to avoid, including those involving stock-sale reporting on Form 8949 and the capital gains holding period, see the full FAQ in the Tax Center.
Find a financial, tax, or legal advisor with experience in stock compensation
Stock compensation raises many questions.
- How much should you contribute to your ESPP?
- When should you exercise stock options?
- Should you sell or hold restricted stock at vesting?
- How can you diversify your company stock holdings?
- How can you minimize your tax bill?
- How do you negotiate for stock compensation in your employment agreement?
While myStockOptions.com is a good place to learn about concepts, issues, and general strategies in equity compensation, at some point you may need an advisor to help with your unique situation. Yet finding a good advisor can be hard when you are busy and don't know where to start. The AdvisorFind Directory from myStockOptions.com is for you.
- Identify and contact an expert who can provide specialized professional guidance on equity compensation.
- Search for advisors by geographical area, type of advisor, years of experience, minimum portfolio size, and other key criteria.
- Look up resources for performing background checks on advisors.
Searching AdvisorFind is free and does not require registration at myStockOptions.com.
Articles, Annotated Diagrams, Videos, And Podcasts On Tax Returns With Stock Compensation
The list below summarizes our exclusive articles, FAQs, diagrams, videos, and podcasts on tax-return topics relating to stock compensation.
FORM 8949 AND SCH. D DIAGRAMS: How To Report Sales Of Company Stock
Understand 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 our popular FAQs with 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.
ARTICLE: 12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs
Puzzled by your W-2 or 1099-B? Don't know how and where to report sales of company stock on your tax return? Get insightful tips to avoid errors that can prove costly!
ARTICLE: Restricted Stock & RSUs: 10 Tax-Return Mistakes To Avoid
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.
FORM W-2 DIAGRAMS: Understand how stock compensation is reported on your Form W-2. Our comprehensive guide to tax-return reporting includes our popular FAQs with annotated diagrams of Form W-2 for all types of equity awards and ESPPs.
VIDEO: Tax-Return Reporting Of Company Stock Sales: How To Avoid Overpaying Taxes
In plain English, the tax experts at myStockOptions.com discuss the rules for reporting stock sales on your tax return, along with 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 video demystifies the "cost basis" of shares acquired from equity compensation and explains why it is crucial to understand your cost basis to avoid overpaying your taxes. (Running time: 8:05)
VIDEO: Tax-Return Forms & Reporting Rules For Stock Sales
If there's a way to make learning about tax forms fun, we'll try it. In this engaging video, learn how to prevent costly tax return mistakes with our animated presentation on IRS Form 1099-B, IRS Form 8949, and Schedule D. (Running time: 8:08)
ARTICLE: Avoid Overpaying Tax On Stock Sales: Understand Forms 1099-B And 8949 For Tax-Return Reporting
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.
PODCAST: What's New For Reporting Stock Sales On Your Tax Return
In this engaging audio, you can get the latest on Form 1099-B, Form 8949, Schedule D, and other tax-return topics involving stock compensation.
PODCAST: Tax Return Tips & Avoiding Reporting Mistakes
Listen to this audio to learn about the tax-return reporting for stock compensation and how to avoid expensive mistakes that attract unwanted IRS attention.
ARTICLE: 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.
ARTICLE: ISOs: Tax Return Tips And Traps
Incentive stock options bring special complexities to tax returns, especially when the alternative minimum tax is involved.
ARTICLE: Stock Option Financial Planning After Your Tax Return Is Filed And At Year-End (Part 1)
The time just after the filing of 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 resources, myStockOptions.com has numerous FAQs on tax-return topics, including a helpful FAQ on a range of ESPP tax-return mistakes.
Media Praise For The Award-Winning Tax-Season Resources Of myStockOptions.com
As tax-return season 2017 entered prime time in late February, the editors at PLANADVISER.com prominently featured the tax-return content of the Tax Center at myStockOptions.com. "The Tax Center provided by myStockOptions.com is offering expanded articles and FAQ discussions that spell out the most common mistakes people make with stock grants on their annual tax return," they observe.
"Examples and annotated forms in plain English show taxpayers and their advisers 'exactly how to report stock compensation and stock sales on tax returns.' The core articles and FAQs help tax filers, financial advisers and accountants 'quickly run through' tax forms to be sure they submit error-free returns. A special FAQ released this tax season sets forth the top 10 questions that taxpayers should ask about the reporting of stock sales on their tax returns."
For more media coverage of the award-winning articles, FAQs, and other content at myStockOptions.com, see the press clippings in the About Us section of the website.
Beware: IRS Penalty For Late Filing Of Tax Returns Increased In 2017
In 2016, the Trade Facilitation and Trade Enforcement Act of 2015 (the "customs bill") was signed into law by President Obama. The legislation includes a provision increasing the penalty for the failure to file federal tax returns on time. Under the prior law, a penalty of $135 or 100% of unpaid tax, which ever is lower, applied when a tax return was filed more than 60 days after the due date. In 2017, the penalty has risen to the lesser of either $205 or 100% of unpaid tax.
For most US taxpayers, the deadline for filing federal tax returns with the IRS for tax year 2016 is April 18, 2017. To gain an automatic six-month extension for the due date of your tax return (until mid-October), you can use IRS Form 4868, Application For Automatic Extension Of Time To File.Alert: If you can file your tax return by the deadline but cannot pay all of your tax bill, do not file an extension. File your return on time and pay as much as you can. The IRS will send you a bill or notice for the remaining amount you owe. See our FAQ on arranging an installment plan with the IRS.
The extension applies only to the filing of your tax return. It does not apply to any tax you may owe, which you must pay by the original IRS filing deadline to avoid penalties. You must accurately estimate how much tax you need to pay. By paying 100% of your tax when you file the extension, you avoid interest and penalties. To avoid the failure-to-file penalty on what you owe, you must file the extension no later than the original deadline of your return. For more details, see our FAQ on filing extensions.
In any tax year, stock compensation income, such as from an NQSO exercise, an ISO or ESPP disqualifying disposition, or the vesting of restricted stock, can raise your income tax and make your return complex. For help, see a special section of this website called Reporting Company Stock Sales.
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For more information on the Think Twice video series, and a free white paper on insider trading prevention and education, see the Think Twice website. Both DVD and VHS formats are available. Qualified corporate buyers, including new IPO companies, can request free previews. Intranet licensing is available.
Need CE Credits? Learning Centers At myStockOptions.com And myNQDC.com Offer Credits For CEPs, CFPs, And Other Professionals
myStockOptions.com and its sibling website myNQDC.com have self-study courses and exams offering continuing-education credits that can be used to meet the CE requirements of a few different professional designations.
At myStockOptions.com, the Learning Center offers up to 30 credits for for Certified Equity Professionals (CEPs) and up to 15 credits for Certified Financial Planners (CFPs).NEW CEP OFFERING! The course Financial Planning With Stock Compensation is now available for 5 CEP credits as well as for 3 CFP credits.
Each course features podcasts, videos, articles, and FAQs from myStockOptions.com. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.
Built on a similar model, the the myNQDC.com Learning Center on nonqualified deferred compensation offers up to 6 continuing education credits for Certified Financial Planners, 6 Professional Achievement in Continuing Education (PACE) credit hours for CLU® and ChFC® certifications, and up to 12 CPE hours for credentialed ASPPA members.
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