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How To Prevent Costly Tax Mistakes With Stock Compensation And Company Shares:
myStockOptions.com Newsletter No. 63 (March 2016)


IN THIS ISSUE

Top 10 questions to ask about reporting stock sales on tax returns
Special issues to be aware of this tax season
Tax season: videos, articles, annotated IRS forms, and podcasts
Beware: IRS penalty for late filing will increase
Continuing education credits at myStockOptions.com and myNQDC.com


SPONSORS OF THIS ISSUE

AdvisorFind Directory from myStockOptions.com: Search this resource for financial, tax, and legal advisors with experience in stock compensation (see the ad below)

Think Twice insider trading prevention videos: educate, entertain, and jolt your employees and executives (see the ad below)

myNQDC.com: Developed for both participants and professionals, a complete online resource about nonqualified deferred compensation plans (see the ad below)


EDITOR'S WELCOME

This newsletter summarizes what's new for the 2016 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 2015, 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.


NEW 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 this website's full range of tax-related articles and FAQs, 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? Elsewhere on this website, special FAQs have examples and annotated diagrams of Form 8949 and Schedule D that show how you report sales of shares acquired from:

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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What's new for tax-return season?

In general, 2015 brought no major tax changes to consider. However, developments over the past few years, such as changes in tax rates or amounts that are indexed yearly for inflation, continue to affect tax-return reporting. Here is a quick take on some issues to be aware of when filing your 2015 federal tax return in 2016:

  • If you received a grant of restricted stock this year and made a Section 83(b) election to be taxed on the value at grant (not permitted for RSUs), under proposed IRS rules you no longer need to attach the paper election to your tax return. See the related FAQ for more details.
  • Under tax-rate hikes that came into effect in 2013, high-income taxpayers have increased tax rates on ordinary income, capital gains, and dividends, along with the return of phaseouts on personal exemptions and itemized deductions (see the FAQ on the American Taxpayer Relief Act).
  • The alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate are now indexed for inflation and have risen (see the related FAQ). These are important for people who have incentive stock options.
  • Following the Supreme Court's decision in Obergefell v. Hodges (June 2015), which legalized same-sex marriage throughout the United States, all same-sex spouses must now use married filing status not just for their federal tax returns but also for their state tax returns (whether married filing jointly or married filing separately). Before Obergefell v. Hodges, same-sex spouses who were married in a state where they did not live had to file as singles if their state of tax residence did not recognize their marriage. As filing under married joint status will often result in more tax than filing as singles will, they probably have little incentive to amend past tax returns from single to joint status. For more about the equity compensation and tax impact of the Supreme Court's decisions on same-sex marriage, see the related FAQ.

Important Recent Changes That Affect Stock Compensation Reporting

The 2015 version of IRS Form 1099-B, which brokers issue for stock sales made during the tax year, closely resembles the version for the 2014 tax year. However, the 2014 version introduced some major changes that you should continue to keep in mind when reviewing your 1099-B and the substitute statement that your broker provides for stock sales in 2015 (see the discussion below and a related FAQ).

  • Among the changes in Form 1099-B last year: 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 (which appears on Form W-2) in the cost basis reported on Form 1099-B.
  • IRS Form 8949 and Schedule D, which you complete by using information on Form 1099-B if you sold company stock or other securities, were revised in recent years. The versions of the forms for the 2015 tax year, to be filed in 2016, are similar to last year's versions. The columns on Form 8949 now match up with the boxes on Form 1099-B.
  • If the basis reported to the IRS is correct on Form 1099-B and does not need any adjustment, the IRS now lets you skip Form 8949 and report the sale only on Schedule D. Usually, however, with stock compensation either the reported basis is too low or the box on the form is blank (see the related FAQ). Even if the basis has been correctly reported, it may be simpler for your recordkeeping to list all of your securities sales together on Form 8949.
Alert: See whether your broker has any supplemental information and tax guides that can help you understand the cost-basis reporting and adjustments needed on Form 8949.

Resources For Tax Season

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 our Tax Center. Elsewhere in the Tax Center, another section 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. We have articles and FAQs with annotated diagrams of Form 3921 and Form 3922 that can help you understand these documents.

If you participate in a nonqualified deferred compensation (NQDC) plan, see myNQDC.com for educational guidance on tax-return reporting.

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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
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 our annually 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? Learn 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.

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: How To Avoid Paying Too Much Tax: Understanding Form 1099-B And Form 8949 For Reporting Stock Sales On Your Tax Return
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.

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Beware: IRS Penalty For Late Filing Of Tax Returns Will Increase In 2017

In February, 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 current law, a penalty of $135 or 100% of unpaid tax, which ever is lower, applies when a tax return is filed more than 60 days after the due date. In 2017, the penalty will rise 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 2015 is April 18, 2016. 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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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.

  • Clear explanations of NQDC by experts
  • Financial planning, taxation, risks, job loss, and legal issues, along with core concepts
  • Appeals to plan participants, plan providers and administrators, financial advisors, attorneys, and companies with NQDC plans

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 (info@mystockoptions.com).

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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 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 25 credits for for Certified Equity Professionals (CEPs) and up to 15 credits for Certified Financial Planners (CFPs). Each course of study features podcasts, 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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