How To Prevent Tax-Return Mistakes With Stock Compensation:
myStockOptions.com Newsletter No. 60 (March 2015)
|IN THIS ISSUE|
This year's big changes for stock-sale reporting on tax returns
Restricted stock and RSUs: the biggest tax-return mistakes to avoid
Articles, video, and podcasts on tax-return topics
Tax-return quiz: test your knowledge of the key rules and forms
Media features: the tax-return expertise of myStockOptions.com
New app for iPhone/iPad and Android: Stock Compensation Glossary
SPONSORS OF THIS ISSUE
Think Twice insider trading prevention videos: Entertain your employees and executives while you educate them about compliance (see the ad below)
AdvisorFind Directory from myStockOptions.com: Search this resource for financial, tax, and legal advisors with experience in stock compensation (see http://www.mystockoptions.com/match and information below)
myNQDC.com: Developed for both participants and professionals, a complete online resource about nonqualified deferred compensation plans (see the ad below)
This newsletter summarizes what's new for the 2015 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. If you received income from equity compensation or sold shares in 2014, you must understand the related reporting on IRS tax forms to avoid making costly errors.
The clear, concise articles and FAQs in our Tax Center can help. Key content includes our annotated diagrams of IRS forms in the sections Reporting Company Stock Sales Form W-2 Diagrams. In our new tax-return quiz, you can test your knowledge (and make painless mistakes) before you file your return.
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.
NEW FEATURE! Now you can take a piece of our expertise wherever you go with our new free app for iPad/iPhone and Android: Stock Compensation Glossary. For details, see the description below.
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 in 2015 with reporting stock sales on my tax return? Why have these changes occurred?|
Major changes have occurred in the tax reporting for stock sales during the past few years, making accurate tax-return reporting more complex and difficult.
The Revised IRS Form 1099-B
Sent by brokers by mid-February, IRS Form 1099-B, or the broker's equivalent substitute statement, reports details about your stock sales. The information on Form 1099-B is sent both to you and to the IRS, though your broker may give you supplemental information beyond what is provided to the IRS.
Alert: The 1099-B for stock sales during the 2014 tax year differs significantly from the 2013 version in several ways, including the following:
- The IRS redesigned the form to match its box numbers with the columns on Form 8949, which you use to report stock sales. The all-important cost-basis information is now in Box 1e instead of the previous Box 3. Also, for grants made in 2014 and later years, brokers are prohibited from including equity compensation income (as included on Form W-2) in the cost basis reported on Form 1099-B.
- A new box at the top center of Form 1099-B indicates the appropriate box to check near the top of Form 8949 when reporting the sale.
- The proceeds that your broker reports must be net of commissions and fees.
- A new box (Box 1g) has been added for adjustments. Do not confuse this with the adjustments needed for stock compensation that are discussed below. Box 1g applies only to the amount of any nondeductible loss in a wash sale or to the amount of accrued market discount.
IRS Form 8949 And Schedule D
The revision of Form 1099-B, which began with the 2011 tax year, 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 complete IRS Form 8949 along with Schedule D. You submit both with your Form 1040 tax return.
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 1e 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.
- Starting in 2011, brokers had the flexibility to include the compensation part of the basis in their reporting to the IRS. However, the rules have changed. The final IRS cost-basis regulations do not allow brokers to report the compensation portion at all for stock grants made on or after January 1, 2014. Therefore, for 2014 sales of company stock acquired from equity compensation and ESPPs, brokers can either (1) report the complete cost basis for pre-2014 grants, while reporting only the partial basis for later grants, or (2) report the unadjusted partial basis for all grants.
- No basis is reported for restricted stock and RSUs, as they are not acquired for cash and are considered noncovered securities.
See our FAQ and brief video on how to handle Form 8949 when the cost basis on the 1099-B is wrong or omitted. Also review the FAQ on the compensation/W-2 income part of the tax basis. You will need that amount for your adjustment on Form 8949 if the basis on the 1099-B is too low.
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 are the biggest mistakes with restricted stock or RSUs that I can make on my tax return, and how can I avoid them?|
Alert: The information on IRS Form 1099-B has changed for stock sales made in 2014, creating special issues for equity compensation (see a related FAQ).
W-2 And Ordinary Income Reporting
When the restricted stock vests (or at the delivery of shares with restricted stock units), the full value of the shares at vesting is reported on your W-2. (See a related FAQ with a diagram to help you interpret your W-2. If you are not an employee, this income appears on Form 1099-MISC.) As an employee, you include this value on your tax return as part of your salary/compensation income on Line 7 of Form 1040. It's the same for restricted stock units, as long as all the shares are delivered at vesting (see another FAQ on RSUs with deferred delivery of shares).
For restricted stock that vests over a number of years (e.g. 25% per year), you realize and report W-2 income with each vesting slice, not when the full grant is vested. One exception: if you made a Section 83(b) election (unavailable with RSUs) to pay taxes on the full value of the restricted stock at grant, you do not then report income again for the value of the shares at vesting.
Dividends you receive on restricted stock can raise a few tax-reporting issues during vesting and after the shares vest, as detailed in a related FAQ. In short, the dividends paid will be compensation during vesting (unless you made a Section 83(b) election, which makes the dividends eligible for the lower tax rate on qualified dividends). Be careful not to duplicate dividend income that is part of your W-2 in the total received dividends on your Form 1040.
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 are also including it as part of your compensation income. You may even have some small gains or losses, 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.)
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.
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 grant value on your W-2.
Alert: Do not assume that, because you did not pay any money to purchase the stock or exercise anything, your tax basis is zero.
The cost basis on Box 1e of your 1099-B may be blank 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). Otherwise, you will pay double tax on the value of the shares at vesting. 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 2014 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 (see a related FAQ on withholding for restricted stock), you want to report any actual market sale of shares on your Form 8949. For share surrender, speak with your own tax advisor about the need to report it (see a related FAQ on the issue). Alternatively, if you sold only some of the shares (e.g. for taxes), or if some shares were withheld at vesting, 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.
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 read four other crucial tips on tax-return reporting involving restricted stock and RSUs, see the full FAQ at myStockOptions.com.
Stock compensation raises many questions.
While myStockOptions.com is a good place to learn about concepts, issues, and general strategies, 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.
Searching AdvisorFind is free and does not require registration at myStockOptions.com.
|Articles, Video, And Podcasts On Tax Returns With Stock Compensation|
The list below summarizes our exclusive articles and audio/video content on 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.
Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know
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
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.
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.
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.
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 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.
The Revised Form 1099-B & 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.
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.
|Tax-Return Quiz: Test Your Knowledge Before You File|
Mistakes on federal tax returns really hurt. By comparison, mistakes in the fun, free quizzes at myStockOptions.com are relatively painless. This is one good reason to take our new tax-return quiz, which tests your understanding of stock compensation issues on tax returns (for our full range of content on tax returns, see our Tax Center). Unlike errors in IRS filings, wrong quiz answers incur no penalty, and links to related content in the answer key immediately present reliable reading to remedy your knowledge.
- If you sold stock during the calendar year, which tax forms must you file with your IRS Form 1040 tax return to report the sale?
- What is the cost basis of stock that has been sold?
- What is a covered security for the purposes of cost-basis reporting on Form 1099-B?
- In the cost basis on Form 1099-B, what does the IRS prohibit brokers from including?
- If the cost basis reported on Form 1099-B is too low or is omitted, what steps should be taken on Form 8949?
- How is a sell-to-cover stock option exercise reported on federal tax returns?
If you don't know the answers to these questions, we recommend that you take our quiz and use it as a study guide. (If you do know the answers, try the quiz and test your smarts.)
All 13 of the short quizzes at myStockOptions.com are available free (companies can license and customize them for their stock plan participants). They are separate from our Learning Center, which has in-depth courses and exams offering continuing education credits for Certified Equity Professionals (CEPs) and Certified Financial Planners (CFP). Our quizzes are also part of our growing body of interactive and multimedia content, which includes podcasts and videos.
Nonqualified Deferred Compensation: myNQDC.com, A Complete Online Resource For Participants And Professionals
Tax-rate increases and the new Medicare surtax have boosted the popularity of nonqualified deferred compensation. From the award-winning publishers of myStockOptions.com, myNQDC.com features articles, FAQs, a glossary, podcasts, interactive quizzes, and a calculator, all to help you, your clients, or your executives understand and make the most of nonqualified deferred compensation.
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.
For more information on myNQDC.com, including its prestigious advisory board, see the About Us section of the website, and please contact us by phone (617-734-1979) or email (email@example.com).
|San Francisco Chronicle And PLANSPONSOR Feature The Tax-Return Expertise Of myStockOptions.com|
As discussed earlier in this newsletter, the cost basis of sold shares that were acquired from stock options and other forms of equity comp is an important yet complex and confusing issue for employees when they complete their tax returns for the year of sale. Misunderstanding cost-basis issues can lead to costly overpayment of tax to the federal government.
While discussing this topic in a feature for the San Francisco Chronicle in January, personal-finance reporter Kathleen Pender cited insights and comments obtained from Bruce Brumberg, the editor-in-chief of myStockOptions.com.
As the 2015 tax-return season deepened in early March, the editors at PLANSPONSOR.com prominently featured the tax-return content of the Tax Center at myStockOptions.com. "The Tax Center has all the answers on the filing and reporting of tax returns that involve stock options, restricted stock, restricted stock units, performance shares, stock appreciation rights, and employee stock purchase plans," they observed.
"Core articles and FAQs spell out the most common mistakes people make with stock grants on their tax returns," continued PLANSPONSOR.com. "Taxpayers, their financial advisers, and their accountants can quickly run through these to be sure they submit error-free returns. The content provides insights into the prevention of tax return mistakes. Examples in plain English show taxpayers and their advisers exactly how to report stock compensation and stock sales on tax returns. A new interactive quiz on tax returns lets users test their understanding of the tax rules before they file."
|New App For iPhone/iPad And Android: Stock Compensation Glossary|
We recently created a free smartphone app: Stock Compensation Glossary. 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, along with the related taxation, corporate accounting, and securities law. It even features a fun interactive quiz game to test your knowledge of equity comp vocab.
Here's how you can get the app:
- For iPhone and iPad: search the App Store or click here.
- For Android: search Google Playstore or click here.
Please download it and give us your feedback. We're sure you'll find it an engaging and useful resource.
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