Tax-Return Reporting For Stock Compensation And Company Shares: myStockOptions.com Newsletter No. 79 (March 2020)
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
COVID-19 prompts IRS delay of April 15 tax-return deadline to July 15
IRS "offer in compromise" regulations finalized
myStockOptions 2020 financial-planning conference, June 15-16
myStockOptions Learning Center: Get CE Credits Online
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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.
Alert: The COVID-19 pandemic of 2020 has prompted a 90-day extension of the April 15 payment deadline (to July 15) for any tax you owe with your 2019 tax return. The postponement applies only to the payment deadline. For now, the tax-return filing deadline is still April 15. For details of this development, see the related newsletter section below.
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?
Below are three big reporting mistakes to avoid when you have compensation income from restricted stock or restricted stock units or if you sold shares acquired from restricted stock/RSU grants in 2019. For others, see the full FAQ on myStockOptions.com. More guidance on tax returns that involve stock compensation, whether stock options, restricted stock units, employee stock purchase plans, or performance shares, is in the articles, FAQs, and annotated diagrams of IRS forms in the Tax Center at myStockOptions.com. Just for fun, try the tax-return quiz to test your knowledge.
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 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.
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 2020: What You Need To Know About New Reporting Rules
Ready or not, tax-return reporting has changed yet again for the 2020 tax-return season. Meanwhile, the impact of the 2018 changes in tax rates and brackets continues. For employees with 2019 income from stock compensation or sales of company stock, this article explains all of the changes you need to know for 2019 tax returns filed in 2020.
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.
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: 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: Stock Option Financial Planning After Your Tax Return Is Filed And At Year-End (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.
The COVID-19 pandemic of 2020 has prompted the postponement of the April 15 tax-return deadline to July 15, both for filing and for the payment of any tax owed with your return. In other words, Tax Day 2020 is July 15. States that have income taxes are expected to make similar provisions for their state tax returns. Be sure to check with your state's tax agency/revenue department.
What about 2020 estimated taxes? You typically make estimated tax payments if the withholding from your salary or supplemental wage income (e.g. stock option exercises, restricted stock/RSU vesting, a cash bonus) is much too low, if you're self-employed, or if you have substantial income from other sources where there is no withholding (real estate sales, dividends, interest, capital gains). During the tax year, under the standard rules, to avoid penalties you pay the IRS either 90% of your expected tax bill or 100% of last year’s taxes (for adjusted gross incomes over $150,000, it is 110%). The due dates for the 2020 tax year are April 15, June 15, and September 15 of 2020 and January 15 of 2021.
Since the IRS is waiving the late-payment penalty for estimated tax payments for the April 15 due date, it is tantamount to an extension. However, it is not yet clear what will happen with the payment due on June 15.
If you lack the funds to pay your income tax, you may want to apply for a payment agreement on IRS.gov. For those who qualify, this usually results in the arrangement of an installment plan, which you request on IRS Form 9465.
In limited circumstances (if you are in deep financial distress), you can make an "offer in compromise" (OIC) with the IRS if you never will be able to pay your tax debts (see IRS Form 656). If accepted, an OIC settles a tax claim for less than its full amount. In 2019, the IRS released final regulations that increase the application fee to $205. The regulations provide an alternative way for the IRS to waive the offer-in-compromise application fee for low-income taxpayers, based on their adjusted gross income (AGI).
Registration is open for the 2020 myStockOptions conference: Financial Planning For Public Company Executives & Key Employees, scheduled to take place on June 15 and 16 at the Hilton San Francisco Airport Bayfront.
The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with our Stock Compensation Bootcamp For Financial Advisors. A full day of conference sessions with expert speakers will follow on June 16. The agenda, speakers, and other details are available at the conference website.
Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces!
If we need to cancel the physical conference because of public health recommendations or requirements amid the COVID-19 pandemic and do not instead have a live-streamed online conference, or if you are unable to attend for related reasons (such as illness with the virus, need to care for a family member who is ill with the virus, or travel restrictions), you can elect to receive one of the following:
- a full refund
- a credit for a future myStockOptions conference
- a credit for myStockOptions and/or myNQDC memberships, with a refund of any remaining conference payment