What's new for the 2019 tax-return season?
For employees who received income from stock compensation or sales of company stock in 2018, there are major changes in IRS forms and reporting to be aware of for 2018 tax returns filed in 2019:
- The IRS Form 1040 tax return has been condensed and new schedules (supplementary forms) funnel information to Form 1040. The other tax returns of the past, Form 1040A and Form 1040 EZ, have been eliminated.
- Total capital gain or loss on Schedule D is now entered on Schedule 1. It is no longer directly entered on Form 1040. The AMT calculation on Form 6251 is now entered on Schedule 2 (see the related FAQ).
- The tax-reform legislation that took effect in 2018 (the Tax Cuts & Jobs Act) affects the tax rates that apply to stock compensation.
These changes are detailed below.
Alert: On the IRS draft of the 2019 Form 1040 (i.e. for the 2020 tax-return season), it appears that for 2019 taxes the capital gains total will return to Form 1040 instead of being reported on Schedule 1. For details, see our commentary on this development in the myStockOptions.com Blog.
Revised Form 1040
The IRS condensed Form 1040 to just 23 lines and created an additional six new schedules that funnel information to Form 1040. That is where you now first enter many of the numbers you previously reported on Form 1040. The major changes to know about include:
1. Compensation reporting. Stock compensation as well as salary income is now reported on Line 1 of Form 1040 (previously Line 7).
2. Stock-sale reporting. When you are reporting a sale of company stock, you still first report it on Form 8949 and enter the totals from 8949 on Schedule D. That part has not changed. However, Form 1040 no longer has a line labeled "Capital gain or (loss)." Instead, the total from Schedule D is now entered on Line 13 of the new Schedule 1 ("Additional Income and Adjustments to Income").
Schedule D is attached to Schedule 1. Totals from Schedule 1 funnel into Form 1040 as part of the amount reported on Line 6, "Total income" (see Form 1040 image above).
3. Other income reporting. The new Schedule 1 is also where you put any stock compensation income not reported on Form W-2. It goes on Line 21 ("Other income") of Schedule 1 (not on Form 1040), with a short description of the income reported.
4. AMT reporting. Alternative minimum tax (AMT), a concern for anyone with incentive stock options (ISOs), is no longer directly reported on Form 1040 from the calculation on Form 6251. Instead:
- The AMT, if owed, from the Form 6251 calculation now goes into Line 45 of Schedule 2 ("Tax"). Attach Form 6251 to Schedule 2. The totals from this schedule go into Line 11 of Form 1040.
- The Form 6251 has new numbers for all its lines. The spread at ISO exercise is reported on Line 2i (previously Line 14). When the ISO stock that triggered the AMT is sold, the difference from the ordinary tax is reported on Line 2k (previously Line 17).
- 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 54 (check box b). The totals from Schedule 3 go into Line 12 of Form 1040. (Previously the Line 25 total from Form 8801 went directly onto 1040 Line 54.)
Rules For Cost-Basis Reporting
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.
Additional Tax-Reporting Resources
The Tax Center has a section that gathers our popular annotated diagrams of Form W-2. These can help you make sense of Form W-2 (which companies issue in January) when the reporting on the form includes income you received from stock options, restricted stock/RSUs, or employee stock purchase plans.
If you exercised ISOs last year, your company will send you Form 3921. If you purchased shares through an ESPP during the year, your company will send you Form 3922. Employers send these forms in January. This website has articles and FAQs with annotated diagrams of Form 3921 and Form 3922 that can help you understand these documents.
For details on the changes brought by the Tax Cuts & Jobs Act (tax reform), including those that affect tax rates on stock compensation, see the related article elsewhere on this website.
If you participate in a nonqualified deferred compensation (NQDC) plan, see our sibling website myNQDC.com for educational guidance on tax-return reporting.