The IRS has yet again revised the Form 1040 tax return and its reporting procedures.

Ready or not, tax-return reporting has changed yet again for the 2020 tax-return season. Meanwhile, the impact of the 2018 changes in tax rates and brackets continues. For employees with 2019 income from stock compensation or sales of company stock, this article explains all of the changes you need to know for 2019 tax returns, to be filed by April 15, 2020.

Alert: The COVID-19 pandemic of 2020 has prompted the postponement of the April 15 tax-return deadline to July 15, both for filing and for the payment of any tax owed with your return. In other words, Tax Day 2020 is July 15. The IRS has issued FAQs to answer questions taxpayers may have about the extension of the deadline. States that have income taxes are expected to make similar provisions for their state tax returns. Be sure to check with your state's tax agency/revenue department.

The major sets of changes to understand:

  1. The IRS Form 1040 tax return, condensed in 2018, has been revised again for the 2019 tax year. The numbered schedules (supplementary forms) of Form 1040 have been reduced to three (Schedules 1, 2, 3).

  2. A new tax return, IRS Form 1040-SR ("US Tax Return For Seniors"), is available for taxpayers born before January 2, 1955. It has a large, easy-to-read font and includes a standard-deduction chart so that these taxpayers don't need to access the instructions, though Schedule A is still available for itemizing deductions.

  3. The discontinued tax returns of the past, Form 1040A and Form 1040 EZ, have not returned.

  4. On the 2019 IRS Form 1040, total capital gain or loss on Schedule D is once again entered directly on IRS Form 1040, not on Schedule 1 as it was last year. For details, see our commentary on this below and in the myStockOptions.com Blog.

  5. The AMT calculation total on Form 6251 is entered on a different line of Schedule 2.

  6. The tax legislation that took effect in 2018 (the Tax Cuts & Jobs Act) continues to affect the tax rates that apply to stock compensation.

These changes are detailed below.

Revised Form 1040

In 2018, the IRS condensed Form 1040 and introduced additional schedules that funnel information to Form 1040. The 2019 IRS Form 1040 has 24 lines. Major recent changes to know about include:

1. Compensation. Stock compensation, along with salary income reported on Form W-2, is entered on Line 1 of Form 1040.

Form 1040 Line 1

2. Other income. In certain circumstances, you may need to use Schedule 1 to report any employee stock compensation income not reported on Form W-2. You use Schedule 1 only as a last resort in the following situation: your company mistakenly omits the income from your W-2, you cannot get a corrected Form W-2c, and you don't file Form 4852 as a substitute for Form W-2. If that is the case, you report the income as "Other income" on Line 8 of Schedule 1. (This reporting changed from Line 21 for 2018 returns to Line 8 for 2019 returns.)

Schedule 1 Line 8

3. Capital gain or loss. If you sold shares during the 2019 tax year, you enter each sale on Form 8949 and report the totals on Schedule D. The capital gain or loss on Schedule D is directly reported on Line 6 of Form 1040. This is different from last year's reporting, in which the total capital gain or loss was entered on Schedule 1 rather than Form 1040.

Form 1040 Line 6

4. Alternative minimum tax (AMT). A concern for anyone with incentive stock options (ISOs), the AMT is no longer directly reported on Form 1040 from the calculation on Form 6251. Instead, AMT from the Form 6251 calculation now goes into Line 1 of Schedule 2 ("Tax").

Schedule 2 Line 1

This is a change from last year's reporting (which was on Line 45). Attach Form 6251 to Schedule 2. The totals from Part I of this schedule go into the Line 12b totals of Form 1040 (previously Line 11).

Form 6251 has not changed since last year, when its lines were revised. The spread at ISO exercise is reported on Line 2i.

Image of Form 6251  with line 2i highlighted.

When the ISO stock that triggered the AMT is sold, the difference from the ordinary tax is reported on Line 2k.

Image of Form 6251  with line 2k highlighted.

The AMT credit that is generated for an ISO exercise that triggers the AMT is recouped through Form 8801, as it was in the past. The amount from Line 25 of Form 8801 now goes into Schedule 3 ("Non-Refundable Credits") on Line 6 (check box b).

Schedule 3 Line 6 box b

The totals from Part I of Schedule 3 go into Line 13b of Form 1040.

Rules For Cost-Basis Reporting

The reporting for the cost basis of sold shares acquired from stock compensation remains complex and confusing.

For stock sales, there is no change in the IRS rules on how the cost-basis information is reported on Form 1099-B. 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 the reporting of stock sales from stock compensation on IRS Form 8949 and Schedule D.

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 this website's Tax Center.

How The 2018 Tax Reform Affected Tax Returns

The Tax Cuts & Jobs Act kept the current seven income tax brackets, reducing the rates and changing the income thresholds that apply. The rates are now 10%, 12%, 22%, 24%, 32%, 35%, and 37%. This means you have lower rates for compensation income, interest, ordinary dividends, and short-term capital gains.

The flat supplemental wage rate for federal income tax withholding on stock compensation is based on the seven brackets. For amounts up to $1 million it is linked to the third lowest rate (22%). For amounts over $1 million it is linked to the highest rate (37%).

As shown by the table below, the 22% rate of withholding may not cover the actual taxes you will owe on the additional taxable income from stock compensation. You must therefore know the tax bracket for your total income. Assess the need to put money aside for payment with your tax return, or pay estimated taxes.

Income Tax Brackets And Rates In 2019

RATE TAXABLE INCOME (SINGLE) TAXABLE INCOME (JOINT)
10% $0 to $9,700 $0 to $19,400
12% $9,701 to $39,475 $19,401 to $78,950
22% $39,476 to $84,200 $78,951 to $168,400
24% $84,201 to $160,725 $168,401 to $321,450
32% $160,726 to $204,100 $321,451 to $408,200
35% $204,101 to $510,300 $408,201 to $612,350
37% $510,301 or more $612,351 or more

For stock compensation, multi-year planning remains useful to minimize when the added income pushes you into a higher tax bracket.

Changes In The Calculation Of The Alternative Minimum Tax (AMT)

The income spread at incentive stock options (ISOs) exercise can trigger the AMT, which warrants complex tax planning. While the AMT or how it applies to ISOs is not repealed, below are the current numbers in the AMT calculation (adjusted annually for inflation).

Filer status in 2019 AMT income exemption amount Exemption amount phaseout starts Exemption amount phaseout ends Point where AMT rate
rises from
26% to 28%
Single $71,700 $510,300 $797,100 $194,800
(married filing separately: $97,400)
Joint $111,700 $1,020,600 $1,467,400 $194,800

Under the TCJA, the higher AMT income exemption amounts and much higher income point where the phaseout starts make it much less likely that ISOs will trigger the AMT. With fewer employees at risk of triggering the AMT by exercising ISOs and holding the shares, companies may start to grant ISOs more frequently, given their potential tax advantages for plan participants.

What pays in part for this change in the AMT calculation is the $10,000 cap on the deduction for state and local income taxes and real-estate property taxes on tax returns. Given the odd way in which the AMT is calculated, those deductions may have triggered or added to your AMT in the past. Strangely enough, given that new cap, a taxpayer who has been paying the AMT may see less tax savings than they might otherwise expect to get from the AMT change.

Alert: When you are deciding whether to exercise ISOs and hold the shares, you still want to determine whether the difference between your long-term capital gains rate and your short-term capital gains rate (same as your income tax rate) justifies the risk of holding shares for a qualifying disposition. That you don't have to pay the pesky AMT should not, on its own, be the determining factor in your ISO strategy.

No Change In The Long-Term Capital Gains Rates (0%, 15%, 20%)

The reduction in the ordinary income rates, which apply to short-term capital gains, lowers the difference between your short-term and long-term capital gains rates. This reduced differential may affect your tax-planning decisions, e.g. whether to hold or sell shares at exercise, vesting, or purchase. While there is no change in the long-term capital gains rates, the tax law created new inflation-indexed taxable income thresholds above which the rate on long-term capital gains and qualified dividends goes from 0% to 15% and 15% to 20%. In the 2019 tax year, for example, the 20% capital gains rate applies to single taxpayers with taxable income of more than $434,550 and to married joint filers with taxable income of more than $488,850. These thresholds no longer line up with federal income tax brackets.