How To Prevent Costly Tax-Return Mistakes: myStockOptions.com Newsletter No. 56
|IN THIS ISSUE|
This year's big changes for stock-sale reporting on tax returns
The biggest tax-return mistakes to avoid with restricted stock and RSUs
Articles on tax-return topics
Video and podcasts on tax-return reporting in 2014
New section: annotated diagrams of Form W-2
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The 2014 tax-return season has more potential than ever for confusion, uncertainty, and expensive mistakes. Anybody who sold stock during 2013 must be sure to understand all the related IRS forms. These include Form 1099-B and Form 8949, which always raise many questions, particularly about how to report the cost basis for stock sales.
For people with stock comp and their tax professionals, the clear, concise, and easy-to-read return content of myStockOptions.com can help. The Tax Center at myStockOptions.com shows exactly how to report stock compensation and stock sales on tax returns, including the annotated diagrams of IRS forms in the section Reporting Company Stock Sales.
This newsletter discusses what's new for this tax season and provides a general introduction to some of our perennially popular tax-return content. 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.
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 with reporting stock sales on my tax return? Why have these changes occurred?|
Major changes have occurred in the tax reporting and filing for stock sales during the past few years, making accurate reporting more complex and difficult. For this tax-return season, the IRS has made important modifications in the key forms.
- IRS Form 8949 and Schedule D, which you file when you have sold company stock or other securities during the tax year, have been revised again. On Form 8949, changes have been made in the checkboxes that indicate whether the cost basis on Form 1099-B was reported to the IRS. In Part II, for long-term transactions, the checkboxes are now labeled D, E, and F (on the prior version of the form, they were labeled A, B, and C). In Part I, for short-term sales, the checkboxes are still labeled A, B, and C.
- In a more interesting change, if the basis reported to the IRS is correct on Form 1099-B, 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.
- The IRS has introduced two tax-return forms for the increases in Medicare tax required by the Affordable Care Act: the additional tax on compensation income (IRS Form 8959) and the surtax on net investment gains (IRS Form 8960). Stock compensation can trigger both of these. For details, see the related FAQ.
IRS Form 8949, Schedule D's New Best Friend
The revision of Form 1099-B 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 now complete the new IRS Form 8949 along with Schedule D, which significantly changed upon the introduction of Form 8949. 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 3 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.
- Brokers are not required to include the compensation part of the basis in their reporting to the IRS. The final IRS regulations (pages 29–30) do not allow brokers to report the compensation portion at all for stock sales made on or after January 1, 2014. (For details about this topic, see our analysis in the myStockOptions.com Blog.)
- No basis is reported for restricted stock and RSUs, as they are not acquired for cash and are considered noncovered securities.
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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1. After selling any or all of the shares at vesting, you still need to report this sale on IRS Form 8949 and Schedule D even though you are also including it as part of your compensation income on Line 7 of IRS Form 1040. 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 about the taxes.
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 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. The cost basis on Box 3 of your 1099-B is blank only because brokers are not required to report the cost basis for noncovered securities, such as restricted stock and RSUs. 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. Another way to mistakenly double-report income can occur if you do not realize that your W-2 income in Box 1 already includes stock compensation income. You may wrongly think it was left out, so you erroneously report the income on your Form 1040 in the line for "Other income" (Line 21 on the 2013 form and not Line 7, mentioned above). If you do this, you will be taxing the stock grant income twice as ordinary income. You use Line 21 only when your company mistakenly omits the income at vesting from your W-2 or 1099-MISC.
4. 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.
To read four other crucial tips on tax-return reporting involving restricted stock and RSUs, see the full FAQ on myStockOptions.com. Also, see other FAQs on this website for the biggest tax-return blunders to avoid with stock options, employee stock purchase plans, or stock appreciation rights.
The list below summarizes our exclusive articles on crucial 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.
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.
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.
|Got Eight Minutes? Try Our Engaging Video And Podcasts On Tax Return Mistakes To Avoid In 2014|
If there's a way to make learning about tax forms fun, we'll try it. In the Tax Center at myStockOptions.com, our animated presentation about reporting company stock sales on tax returns covers IRS Form 1099-B and cost-basis reporting, along with IRS Form 8949 and Schedule D. It's a painless way to learn these important developments and prevent expensive mistakes on tax returns during the imminent tax season.
In a concise, engaging overview, our editor-in-chief Bruce Brumberg talks about:
- the expanded reporting on Form 1099-B, and why the reported cost basis may be wrong or omitted
- how to figure out the right cost basis for your stock sales
- Form 8949 and how to report stock sales on it
- how to interpret Form 1099-B when completing Form 8949
- what to do when the cost basis in Box 3 of Form 1099-B is too low or not given
- totaling the reported stock sales on the revised Schedule D
Try it! It's fun, it's informative, and it's just eight minutes long.
The video can also be licensed and customized to fit your stock plans, as can any content on myStockOptions.com. If you're on the go and can't watch, you can still download our podcasts on tax-return topics and listen to them at any time.
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 (firstname.lastname@example.org).
|New Section With Annotated Diagrams Of Form W-2|
If you had income from stock compensation or an employee stock purchase plan in 2013, you need to understand where that income is reported on Form W-2 so that you can complete your tax return properly. In the award-winning Tax Center at myStockOptions.com, we have a special new section of FAQs about Form W-2 reporting for stock compensation. Each one includes an annotated diagram of Form W-2 that clearly interprets this sometimes cryptic document.
If you sold shares from stock compensation or an ESPP last year, you'll need still more guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting.
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