Turbotax incentive stock options

Turbotax incentive stock options

Posted: Lorrosono Date: 06.06.2017

Tax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more. By the end of January, you should have received your IRS Form W-2, as usual. It will show any ordinary income stemming from stock options or employee stock purchase plans.

If you sold shares during , before mid-February your brokerage will send you IRS Form B, which brokers usually reformat into their own substitute statement. Form B reports stock sales made during the year. The IRS also receives both of these forms.

The expansion of the information given on Form B led to the introduction of Form , which you must file alongside Schedule D when reporting stock sales. Form is where you list the details of each stock sale, while Schedule D aggregates the column totals from this form to report your total long-term and short-term capital gains and losses. In addition, you will also receive IRS Form if you purchased ESPP shares in and IRS Form if you exercised ISOs in Puzzled by what to do with your W-2, the revised B, or Forms and ?

Don't quite know how and where to report sales of company stock on Form and Schedule D? Even if you hire someone to handle your tax return tax specialists are helpful , you can nevertheless benefit by knowing some of the basics presented in this article about income tax reporting for company stock. The Tax Center of this website also provides annotated diagrams of Form and Schedule D showing how to report stock sales on tax returns.

If you need to report income from restricted stock or restricted stock units, see a companion article. Although tax reform is likely in , it will not affect tax-return reporting of income.

However, it is worth remembering that a couple of years ago, the IRS introduced big changes in the Form B reporting for stock sales. These created confusion in the Form reporting for sales of stock acquired from equity compensation, and they raised the risk of overpaying taxes.

For the tax-return season covering stock sales in , the forms and rules have not changed, though the overpayment risk remains. With sales of stock acquired from equity compensation, it remains important to understand the cost-basis rules covered below. Don't let your W-2 trip you up. When you exercise NQSOs, even if you don't sell any shares, the difference between the exercise price and the fair market value FMV of those shares will be treated as ordinary income and included in Box 1 of your Form W-2 and in the other boxes for state and local income see the FAQ showing an annotated diagram of Form W-2 for NQSOs.

For ISOs, only when you make a disqualifying disposition will the income appear on your W-2, but no withholding occurs see the FAQ showing an annotated diagram of Form W-2 for this situation. When you look at the line for "Other income" on your Form Line 21 on the form , don't make the mistake of listing the amount shown in Box 12 of your W-2 or any income already included in Box 1 for stock compensation.

You're already including it as part of Line 7 of the Form wages, salaries, tips, etc. That would be painfully expensive double-counting of income! To double-check how much compensation came from salary versus options, compare your year-end pay stub with your W The difference between the two statements should reveal your option income.

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Return to top of page Mistake No. Failing To Report Sales. If you exercised NQSOs last year, the withheld federal, state, Social Security, and Medicare taxes will appear on your Form W-2 , along with the spread at exercise, which will be treated as ordinary income. Also, if you sold shares during the tax year, your broker should send you IRS Form B showing the sales.

Using the B, you report on IRS Form and Schedule D the sales proceeds, along with the other information from the B. While the B now includes more information than it used to, it does not show withheld taxes, unless backup withholding was triggered. Be sure you report the sale even with a cashless exercise in which all the income is already on your W-2 and you appear to have no additional gains on the sale. In some cases with a cashless exercise, there will still be a small short-term gain or loss, depending on the commission.

As explained in the next section, about the tax basis, you will not be overreporting your income. In special situations where your broker is not required to give you a Form B for the cashless exercise see a related FAQ you should still report the sale on Form When you sell your shares, the sales price again, after commissions minus your cost basis equals your capital gain or loss.

The revised B reports your tax basis in Box 1e instead of boxes, your broker's substitute statement may use columns with the same numbering. However, the cost-basis information reported to the IRS in Box 1e of Form B may be too low, or the box may be blank. This is because the rules for cost-basis reporting are mandatory only for stock acquired in and later.

In addition, for shares acquired from option grants made before , brokers can include as part of the basis only the compensation triggered at exercise. Furthering the potential confusion, shares not acquired for cash, such as shares from a stock-swap exercise, SARs exercise, or restricted stock vesting, are considered noncovered securities. On Form , always use the cost basis and the gross proceeds shown on Form B or the reformatted substitute statement from your broker.

You want to report the figures that the IRS receives. It is up to you—not your company, your broker, or the IRS—to make any necessary modifications on your Form A few fixes for common situations:.

Each type of exercise method can create its own confusion with the reporting of shares sold either at exercise or later. For example, with a sell-to-cover exercise, if you sold only some of the shares at exercise you don't want to report on your Form and Schedule D the cost basis for all the shares exercised. This would result in a much larger tax basis and a capital loss for these shares sold. In the Tax Center on this website, see our tax-return video and the special section Reporting Company Stock Sales.

It has annotated diagrams of Form and Schedule D for reporting situations involving sales of all types of stock compensation and ESPPs. Return to top of page. Sometimes people don't tell their accountants or the IRS about incentive stock options that they have exercised and held; they may believe that exercise without a sale is a nontaxable event. So they figure in good faith that the accountant or IRS doesn't need to know.

Others may have forgotten about ISO exercises, particularly since the stock value isn't reflected in W-2s. Alternatively, you may know too well about your expected AMT hit on paper profits for last year's exercise and hold. Since there is no W-2 paper trail, you wonder why your accountant or the IRS needs to know about your exercise. The problem with this omission is that it will make your alternative minimum tax calculation incorrect. Instead, you have income for AMT purposes.

In addition, when the time comes to sell the stock, this is reported to the IRS. An audit could reveal that the earlier ISO exercise and hold was not considered in the AMT calculation. Along with paying the back taxes you owe, you would then pay interest and penalties too.

If you cannot come up with the cash for the taxes that are due with your return for the AMT, you may want to work out a payment plan with the IRS. The AMT is basically a pre-payment of the tax on ISOs. IRS Form is used to figure the amount, if any, of your AMT. You report the ISO exercise spread on Line Although it can take longer than you like to recover the money you paid, you get a credit for AMT in subsequent years.

You need to calculate your AMT in every future year until the credit is used up, even before selling the ISO stock. Traditionally, the credit each year is limited to the amount by which your ordinary income tax exceeds your AMT, and any unused credit is carried forward for information on the new refundable credit, see the alert below.

Some people forget about a previous year's adjustment for AMT and fail to carry credits forward to use in years when their regular income exceeds AMT income.

12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs - nocuwahojopyx.web.fc2.com

To avoid this error, look at your past taxes and see whether you had any AMT credit eligible to be carried over into this year. If so, IRS Form is where you'll figure your credit. Form is also used to compute how much of an AMT credit, if any, you'll be able to carry forward to next year.

You can download forms and instructions at www. Inadvertently Overpaying AMT In The Year Of An ISO Sale. The tax rules that apply to selling ISO shares after paying AMT perplex even experts.

How to Report Stock Options on Your Tax Return - TurboTax Tax Tips & Videos

Once you have AMT for your ISO stock, you essentially need to keep two sets of records: You must do this to properly use the credit to reduce future taxes.

ISO stock is an example of what tax experts call "dual basis assets" because it has a different basis for regular income tax and another one for the AMT. As Kaye Thomas explains in his excellent book Consider Your Options , "The AMT gain or loss on a sale of that asset won't be the same as the regular tax gain or loss.

turbotax incentive stock options

If you're not alert to this situation you may end up needlessly paying more tax than required. As you do with any securities sale, you report the sale of the stock on Form and Schedule D but you also prepare an AMT version that you do not file. Capital gain or loss for your ordinary income tax will depend on the stock's exercise price and whether the stock price at sale was less than, equal to, or greater than the ISO exercise price.

Your AMT basis will be higher than your regular tax basis, as it includes the spread at exercise. The key to avoid paying or calculating more AMT than is required for your ISO stock sale is also to report as a negative amount your "adjusted gain or loss" on Line 17 of Part I of AMT Form This amount is the difference between your regular income tax and AMT capital gains.

The instructions for IRS Form include a detailed example of this loss sale situation. You should not include the discount in the year of purchase unless you also sell the shares in the same year. If you hold the shares for more than one year after the date of purchase, and more than two years after the beginning of the offering period, you'll have ordinary income in the year of sale equal to the lesser of either the actual gain upon sale or the purchase price discount at the beginning of the offering see a related FAQ with examples of the tax treatment.

Regardless of how long you hold ESPP shares, your tax basis is the purchase price plus whatever amount of income you recognized.

The full discount doesn't qualify for capital gains treatment even if you hold your stock for longer than one year. But beyond the discount, all additional gain is treated as long-term capital gain. When you don't satisfy the ESPP holding periods, you have compensation income in the year of sale equal to the spread at purchase, i.

Regardless of how long you hold the shares, your tax basis is the purchase price plus whatever amount of income you recognized. Depending on when you purchased the stock and how your broker is reporting the compensation part of your tax basis on the revised Form B, the cost basis listed on that form may be incorrect or blank see another article for the reason and how to handle the related tax reporting on Form For sales of stock from ESPPs that are not tax-qualified under IRC Section , the taxation , along with the potential reporting mistakes, is similar to that for NQSOs.

For all types of ESPP, see the section ESPPs: Taxes Advanced for details and examples, including a helpful FAQ on a range of ESPP tax-return mistakes. If you exercised ISOs and the stock split before you sold, you need to ensure that your tax professional knows how many shares you were granted compared with how many you got as a result of the stock split. Otherwise, your accountant may assume that you have a larger AMT preference than you actually do, and you'll end up paying more tax than you should.

Splits also affect your tax basis they are not a disqualifying disposition , whether they are from ISO or NQSO exercises, ESPP purchases, or restricted stock vesting. If you worked for a business that went bust, don't forget to take a loss from completely worthless company stock you may own. For you to obtain the loss, the company must effectively be out of business, and you can't have any reasonable expectation of being able to sell your stock.

If you purchased stock in such a company, your loss is equal to the amount you paid for your shares. You report a worthless security on Form and Schedule D, and you must follow the rules on capital losses and carry-overs.

For NQSOs, the value of the stock on the exercise date i. Your proceeds, of course, are zero. You do not get to write off any income that you previously reported or taxes that you paid in acquiring the stock.

The tax treatment is usually the same when securities fraud caused the stock to lose all or most of its value, as explained in an FAQ on that topic. Worthless stock needs to be written off in the year it becomes worthless, and the sale date that you put on Form and Schedule D is the last day of the relevant tax year.

Otherwise, you'll need to amend your tax return to use the writeoff. You have seven years to amend your return for worthless securities, not the usual three. Failing To Take Advantage Of Special Tax-Code Sections.

It is easy to miss perfectly legal tax breaks, especially for people with options and founder's stock. Section and Section of the Internal Revenue Code are especially relevant for founders and employees with stock in startups. After a series of extensions, the Protecting Americans from Tax Hikes PATH Act of , enacted near the end of , made permanent this special tax treatment for QSB stock acquired after September 27, A holder of qualified small business stock can, alternatively, roll over tax-free any gain into another qualified small business within 60 days of the sale.

turbotax incentive stock options

However, be careful about any so-called tax shelters for option income. Often what looks too good to be true catches the attention of the IRS and could subject you to paying back taxes and penalties. Botching The Math And Forgetting About Capital-Loss Carry-Forwards.

If you've managed to avoid these first 10 mistakes: Most of the hard work is behind you. This next error is one that affects all taxpayers, particularly those who complete their tax returns manually. It may seem strange, but many blunders are purely mathematical. Look out for areas where it is especially easy to make mistakes:. Don't trip up on simple careless mistakes that can delay the processing of your tax return and subject you to IRS penalties.

Even if your return is prepared by a tax professional, spend a few extra moments to check it for slip-ups. Be sure to ask questions about anything that does not make sense to you.

Tax software, and asking tax-reporting experts to review your return, can reduce many mistakes. The IRS e-file and Free File services are regularly updated for changes in tax law. But even electronic filing won't catch things like transposed Social Security numbers names on returns must match Social Security numbers in the database of the Social Security Administration.

For tax returns that are overly complex, or if you need extra time, the IRS has made it easier to get a six-month filing extension with Form see a related FAQ ; you still must pay any taxes you owe by the normal deadline. Even when you cannot pay what you owe, you may want to at least file, as the penalty for late filing is much bigger than the penalty for late payments.

Schedule D cannot be attached to Forms EZ or A. IRS forms EZ and A do not allow the attachment of Schedule D. If you sold stock during the tax year, you will need to file IRS Form Beware of email scams. The IRS has issued warnings about email scams involving tax refunds.

Refunds do not as many of these scams suggest require a separate IRS form. In fact, the IRS never sends taxpayers unsolicited email and does not ask them for detailed personal and financial information by email. On its website, the IRS has a tool that can give taxpayers information about the status of their refunds Where's My Refund? With electronically filed returns, information is available 72 hours after the IRS confirms receipt. If you file a paper return, information is available three or four weeks after submission.

Bruce Brumberg is the Editor-in-Chief of myStockOptions. Lynnette Khalfani is the CEO of TheMoneyCoach. Need a financial, tax, or legal advisor?

Search AdvisorFind from myStockOptions. Key Points Stock options and employee stock purchase plans bring their own special issues to your tax return. Common mistakes to avoid include double-counting income, misreporting the cost basis, or miscalculating taxes on ESPP income.

turbotax incentive stock options

Other common errors include messing up the AMT calculation, overpaying AMT, and forgetting to use capital-loss carry-forwards. This tax season has the potential to be confusing if you sold stock in For stock sales, you must file with your tax return IRS Form and Schedule D.

To avoid overpaying taxes, be aware of the issues involving the cost basis for stock sales reported on IRS Form B. You must file both Form and Schedule D when reporting stock sales on your tax return. Be sure you do this reporting even for a cashless exercise in which all the income is already on your W On Form , always use the cost basis and gross proceeds on Form B. These are the figures the IRS receives. People who read this article also read: Avoid Overpaying Tax On Stock Sales: Understand Forms B And For Tax-Return Reporting ESPPs Taxation Made Simple Restricted Stock Units Made Simple Part 2: Taxation Restricted Stock Taxation: What You Need To Know Part 2 ISOs: Tax-Return Tips And Traps NQSOs: Tax-Return Tips And Traps.

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