Tax-Return Reporting For Stock Comp And Company Shares: myStockOptions Newsletter No. 87 (March 2022)
How to avoid the biggest tax-return mistakes with restricted stock or RSUs
Top 10 questions to ask before you report stock sales on your tax return
Articles, videos, and other resources on tax-return reporting
Special tax-season webinar available on demand
Top three tax numbers to know in 2022
myStockOptions Learning Center: CE credits online
SPONSORS OF THIS ISSUE
StockOpter: Professional Equity Compensation Planning Software (see the ad below)
myStockOptions Webinars: From stock comp basics to advanced financial and tax planning, our webinars have something for everyone (see the ad below)
AdvisorFind Directory from myStockOptions.com: Search this resource for financial, tax, and legal advisors with experience in stock compensation (see the ad below)
There's a lot going on right now. The last thing you want is headaches with your IRS tax return. Tax returns involving stock compensation are complicated, whether the income is from stock options, restricted stock units, an employee stock purchase plan, or sales of company shares acquired from equity comp. The special reporting issues can flummox even experienced accountants and financial advisors. Meanwhile, mistakes can lead to overpayment of taxes or (perhaps even worse) unwanted attention from IRS auditors.
myStockOptions is here to help. This issue of our quarterly newsletter highlights the popular, award-winning tax-return resources of the myStockOptions Tax Center, which can be (and is) licensed by companies and stock plan providers for plan participants.
SPECIAL WEBINAR: Our 2022 webinar on how to avoid tax-return mistakes with equity comp and stock sales, including case studies from tax experts, is now available on demand. With webinar access you get the presentation slide deck and the helpful webinar handouts, including a handy checklist for tax returns. See the myStockOptions Webinar Channel for upcoming webinars and other past webinars on demand.
Don't want to wait for our quarterly newsletter updates? The myStockOptions.com Blog is a great way to stay informed about new developments in equity compensation. You can also follow us on Twitter and Facebook. In addition, I now have a blog at Forbes.com.
—Bruce Brumberg (Editor-in-Chief)
What are the biggest mistakes with restricted stock or RSUs that I can make on my tax return, and how can I avoid them?
Most of the potential mishaps, presented below, concern reporting stock sales on IRS Form 8949 and Schedule D of IRS Form 1040 or misinterpreting your Form W-2. (For more on that topic, see a related article.)
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. Your cost 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), even though you never purchased the stock. 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, or on any supplemental statement you get, 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. What your company may have reported in Box 14 of Form W-2 does not change the Form 1040 reporting. Wrongly thinking the income was left out of Box 1 may prompt you to erroneously report it as "Other income" on Schedule 1. Doing that would cause the income to be taxed twice as ordinary income, as it was already included in the W-2 income reported on Line 1 of Form 1040.
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.
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.
5. When you report sales on Form 8949, always use the gross proceeds amount/number on the Form 1099-B you get from your broker. This is what the IRS receives. On Form 1099-B, your broker is now required to subtract commissions or other fees, but if it does not, remember to instead make an adjustment in column (g) of Form 8949. Do not add commissions or fees to the cost basis.
For more big tax-return mistakes to avoid, see the full FAQ. See also other FAQs on this website for the biggest tax-return blunders to avoid with stock options, employee stock purchase plans, or stock appreciation rights. IRS Publication 17 is a general manual of the rules and guidelines for completing tax returns.
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What are the top 10 questions I should ask before I report my 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? A special section in the Tax Center on this website 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
For the next five questions to ask, see the full FAQ at myStockOptions.com.
The list below summarizes our exclusive articles, FAQs, diagrams, videos, and podcasts on tax-return topics relating to stock compensation.
ARTICLE: Tax Season 2022: What You Must Know About New Reporting Rules
Ready or not, tax-return reporting has changed yet again for the 2022 tax-return season. Meanwhile, the impact of the 2018 changes in tax rates and brackets continues. For employees with 2021 income from stock compensation or sales of company stock, this article explains all of the changes you need to know.
ANNOTATED DIAGRAMS OF FORM 8949 AND SCHEDULE D: 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.
INTERACTIVE QUIZ: Tax Returns
Test your knowledge with our interactive quiz on tax returns, including links to further reading in the answer key.
CE COURSE: Taxation & Tax Reporting: Course of Study and Exam
Offering continuing education credits for CFP, CEP, and CPWA/CIMA, this comprehensive self-study course features articles, FAQs, podcasts, and videos from myStockOptions. In the 30-question exam that follows, the answer key links to relevant content on the site for further reading and learning.
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)
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: 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: Restricted Stock And Stock Options: Financial Planning After Your Tax Return Is Filed (Parts 1 and 2)
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.
Held live on March 3 and now available on demand, the myStockOptions webinar Preventing Tax-Return Errors With Stock Comp And Stock Sales features insights from a panel of tax experts on how to avoid errors with tax returns involving equity comp and sales of company shares. It also offers special insights from panelist case studies on how to use information in tax returns to create better financial plans. The webinar recording offers 2.0 CE credits for the CFP, CEP, and CPWA/CIMA designations.
- Stephanie Bucko, CPA, CFA®, Mana Financial Life Design
- Dan Hodgin, CPA, Silicon Valley Tax Group
- Daniel Zajac, CFP®, EA, Zajac Group
- moderator: Bruce Brumberg, JD, editor-in-chief of myStockOptions
A detailed agenda is available at the webinar on-demand page. With webinar access you get the presentation slide deck and the helpful webinar handouts, including a handy checklist for tax returns.
See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each on-demand webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP:
Preventing Tax-Return Errors With Stock Comp And Stock Sales: Understand the rules of tax-return reporting for stock options, restricted stock/RSUs, ESPPs, and sales of company shares. Learn how to avoid the common mistakes that can lead to overpaying taxes or unwanted IRS attention. Case studies show how to use tax-return info to improve financial plans.
Restricted Stock & RSU Financial Planning: Advanced Bootcamp: Expertise from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.
Stock Option Exercise Strategies: Advanced Bootcamp: It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.
Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition: Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.
Stock Compensation Bootcamp For Financial Advisors: Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.
Strategies For Concentrated Positions In Company Stock: Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.
Amid the tax-return season, focused on 2021 income, don't forget to look ahead at basic tax planning for 2022. Key numbers in tax-law provisions are adjusted for inflation at the start of each year. Some of these adjustments are important for you, your paycheck, and your planning. As many tax-code sections are annually modified for inflation, it can be hard to spot the adjustments that matter to you.
Below are the top three sets of tax figures in 2022 that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings.
1. The Social Security Wage Base
Social Security tax (6.2%) applies to wages up to a maximum amount per year set annually by the Social Security Administration. Income above that threshold is not subject to Social Security tax. (By contrast, Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level.)
In 2022, the Social Security wage cap is $147,000, up slightly from $142,800 in 2021. This means the maximum possible Social Security withholding in 2022 is $9,114. Once your income is over the wage cap and you’ve maxed out the withholding, you’ll see 6.2% more in your paycheck!
2. Your Income-Tax Bracket And Withholding
The table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate (i.e. the percent of tax you pay for an additional dollar of income in your current tax bracket). This number tells you whether the taxes withheld according to your information on the revised Form W-4 will cover the total tax you will owe for 2022. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.
Need To Pay Estimated Taxes?
Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate. Instead, they apply the IRS flat rate of 22% for supplemental income (the rate is 37% for yearly supplemental income in excess of $1 million).
Income Tax Brackets And Rates In 2022
|RATE||TAXABLE INCOME (SINGLE)||TAXABLE INCOME (JOINT)|
|10%||$0 to $10,275||$0 to $20,550|
|12%||$10,275 to $41,775||$20,550 to $83,550|
|22%||$41,775 to $89,075||$83,550 to $178,150|
|24%||$89,075 to $170,050||$178,150 to $340,100|
|32%||$170,050 to $215,950||$340,100 to $431,900|
|35%||$215,950 to $539,900||$431,900 to $647,850|
|37%||more than $539,900||more than $647,850|
As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% may not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the 2022 tax return you will file in 2023, pay estimated taxes during 2022, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall.
3. Your Contribution Limit For Qualified Retirement Plans
In 2022, you can elect to defer up to $20,500 from your paychecks into qualified retirement plans, such as your 401(k). That annual limit increased in 2022 from $19,500, where it had been for several years.
The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $61,000 in 2022, a $3,000 increase over last year’s amount. If you are 50 or older, you can contribute an additional $6,500 per year.
The amount of compensation income that can be considered in the calculation for qualified deferrals rose to $305,000 in 2022. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.
Want To Defer More Income?
Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan or other name. For more on these plans, see our sibling website myNQDC.com.
Here are resources with more details on the many adjusted 2022 tax numbers:
- Revenue Procedure 2021-45 gives inflation adjustments in various income-tax-related provisions.
- IRS Notice 2021-61 and an IRS table give the annual adjustments related to various tax-qualified retirement plans.
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.
|myStockOptions Learning Center offers convenient continuing education (CE) credits|
Including our popular course on taxation and tax reporting, the myStockOptions.com Learning Center has self-study courses and exams that offer continuing professional education:
35 CE credits for Certified Equity Professionals (over 100% of the total requirement)
21 CE credits for Certified Financial Planners (70% of the total requirement)
21 CE credits for CPWAs and CIMAs (over 50% of the total requirement)
Potential self-reportable CPE for Certified Public Accountants (CPAs) and CE for CFA Charterholders (see the Learning Center for information)
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.