IRS Type 1040 Modifications Affect Inventory Choices, RSUs, ESPPs

Shock! (Or possibly not.) Tax-return reporting has modified but once more for the 2022 tax season. For those who had earnings in 2021 from fairness compensation, whether or not from inventory choice workouts, restricted inventory/RSU vesting, or gross sales of firm inventory, this text explains what it is advisable to find out about IRS tax returns within the 2022 tax season.

The Modifications In Transient

Whereas the IRS Type 1040 for 2021 stays at 38 strains, modifications have been made in its supporting types. In 2018, the IRS condensed Type 1040 from its prior 79 strains in an effort to make it “postcard dimension.” It shifted lots of these strains to supporting “schedules” that funnel data to Type 1040. The IRS has made modifications in a few of these schedules:

• Schedule 1 (“Further Earnings and Changes to Earnings”) is the place it is best to enter (below the expanded entries for “Different Earnings”) the quantity of any inventory compensation you earned as an worker that was mistakenly omitted out of your Type W-2. Up to now, it was unclear the place and methods to report this earnings.
• Schedule 2 (“Further Taxes”) now has devoted strains for quantities coming from the tax kind for the Further Medicare Tax on compensation earnings and the tax kind for the Internet Funding Earnings Tax (e.g. on capital beneficial properties and dividends from firm inventory).
• Schedule 3 (“Further Credit and Funds”) now has a selected line for any credit score for prior minimal tax. This might apply to anybody with incentive inventory choices (ISOs) who has triggered the various minimal tax (AMT).
• The totals on Schedule 1, Schedule 2, and Schedule 3 of Type 1040 seem on totally different strains on these schedules, however are entered on the identical strains of Type 1040.

Highlights Of Type 1040

For the reporting of inventory comp earnings and gross sales of shares, under are key points of the Type 1040 tax return and its related schedules and types, together with different particulars of the modifications outlined above for the 2022 tax season.

1. Compensation. Inventory compensation, together with wage earnings reported on Type W-2, is entered on Line 1 of Type 1040 (see picture under).

2. Capital acquire or loss. For those who offered shares through the 2021 tax 12 months, you enter every sale on Type 8949 and report the entire on Schedule D. You then report that Schedule D whole on Line 7 of Type 1040 (see picture under). After three straight years by which capital beneficial properties reporting modified on Type 1040, it stays the identical on the 2021 tax 12 months return.

For inventory gross sales, there’s nonetheless no change within the IRS guidelines on how the cost-basis data is reported on Type 1099-B and Type 8949. Brokers are prohibited from together with fairness compensation earnings as a part of the associated fee foundation reported on Type 1099-B. This creates tax-return confusion and problems, as solely the train price (i.e. what you paid for the shares) seems on the 1099-B. To keep away from the danger of overpaying taxes, it is advisable to make an adjustment on Type 8949.

For restricted inventory/RSUs, confusingly, the associated fee foundation reported on Type 1099-B is zero or the field is left clean. Nonetheless, the proper price foundation is the worth of the shares at vesting. That’s what it is advisable to report on Type 8949.

3. Various minimal tax (AMT). A priority for anybody with incentive inventory choices (ISOs), the AMT is calculated on Type 6251. The unfold at ISO train is reported on Line 2i if the ISO inventory was not offered within the calendar 12 months of train. If the ISO inventory that triggered the AMT was offered, the distinction from the bizarre tax is reported on Line 2k. You enter your Type 6251 calculation on Line 1 of Type 1040’s Schedule 2 (“Tax”). You connect Type 6251 to Schedule 2. The totals from Half I of Schedule 2 go into Line 17 on Type 1040.

The AMT credit score that’s generated for an ISO train that triggers the AMT is recouped by means of Type 8801, because it was previously. The quantity from Line 25 of Type 8801 goes into Schedule 3 (“Non-Refundable Credit”) on Line 6b, “Credit score for prior 12 months minimal tax.” That is the primary tax 12 months the AMT credit score has its personal line on the schedule. The totals from Half I of Schedule 3 go into Line 20 of Type 1040.

4. Fairness compensation earnings left off W-2. If your organization doesn’t report your worker inventory compensation on Type W-2 and doesn’t later ship you a corrected W-2c, the revised Schedule 1 for the 2021 tax 12 months signifies that the quantity goes within the “Different Earnings” part on Line 8j (“Inventory Choices”).

The record of things “a” by means of “p” (plus “z”) below “Different Earnings” on Schedule 1 is new for the 2021 tax 12 months. Beforehand, taxpayers listed the kind of different earnings and the quantity, or put the main points in a supplemental attachment. The whole for different earnings from Schedule 1 goes into Line 8 of Type 1040.

Alert: The IRS expects you to report and pay tax on earnings mistakenly left off your Type W-2. An error by your employer doesn’t launch you from that obligation.

Within the directions for Type 1040 (pages 86–87), the IRS directs that the part “Different Earnings” on Schedule 1 is the place to place any worker inventory choice earnings that’s not in your Type W-2 and is due to this fact not reported on Line 1 of Type 1040:

Line 8j—Inventory choices. Enter on line 8j any earnings from the train of inventory choices not in any other case reported in your Type 1040 or 1040-SR, line 1.

Earlier than this growth, some tax specialists thought this “Different Earnings” class was not for compensation-related earnings (just for non-wage earnings). As an alternative, they believed taxpayers wanted so as to add the unreported W-2 earnings to wages reported on Line 1 of Type 1040. Nonetheless, a non-match of W-2 Field 1 and Type 1040 Line 1 can increase crimson flag with IRS computer systems.

“Clearly, inventory choice earnings left off the W-2 shouldn’t be reported on the ‘wages and salaries’ line on kind 1040,” explains Elliott Puretz, a CPA and retired school accounting professor within the Boston space. “From my assessment of Schedule 1 and the worksheets that help it, it seems that Line 8j is the road for it.”

Unresolved points with this transformation in Schedule 1 embrace the query of how broadly to learn the IRS directions. It may be assumed to use to all inventory choices, and possibly ESPPs too. The IRS typically makes use of the time period train for buy and refers to ESPPs as inventory choices. Nonetheless, the directions don’t handle methods to deal with restricted inventory/RSUs. For these fairness awards it’s the vesting that triggers the taxable occasion and no train applies. The IRS has not but responded to my requests for clarification.

If you’re not sure that every one fairness compensation earned as worker left off the W-2 goes on Line 8j, then it could match into Line 8z (“Different Earnings. Record kind and quantity”). “RSUs will not be inventory choices, so any earnings for these not reported as wages would presumably be reported on line 8z,” suggests Michael Grey, a CPA in San Jose (California) and a co-author of Secrets and techniques Of Tax Planning For Worker Inventory Choices.

5. IRS Type 1099-NEC for nonemployees. For workers, tax withholding happens at NQSO train or restricted inventory/RSU vesting, and the earnings ought to seem on Type W-2, as defined above. For nonemployees, resembling consultants and administrators, there is no such thing as a withholding and the earnings from train or vesting now seems on IRS Type 1099-NEC (“Nonemployee Compensation”) as self-employment earnings. (Earlier than 2020, it was Type 1099-MISC.)

Earnings is reported on Type 1099-NEC in Containers 1 and seven. You report this earnings on Schedule C of your Type 1040 tax return. Because the earnings is self-employment earnings, you additionally have to calculate on Schedule SE any Social Safety and Medicare taxes that you simply owe.

6. Estimated taxes. The flat charge for federal supplemental withholding that applies to inventory compensation (22%, however 37% for quantities over $1 million) might not cowl the precise taxes you owe in response to your marginal tax charge. You will have paid estimated taxes due to extra earnings from restricted inventory/RSU vesting, an NQSO train, an ISO train/sale, or an ESPP buy/sale. On the 2021 Type 1040, estimated tax funds are reported on Line 26.

Further Tax-Reporting Sources

For steerage on the tax-return reporting for inventory compensation and gross sales of firm shares, together with annotated diagrams of Type W-2, Type 8949, Schedule D, Type 3921, and Type 3922, see the Tax Middle on myStockOptions.com. I’m additionally moderating an upcoming webinar that can function main tax specialists: Stopping Tax-Return Errors With Inventory Comp And Inventory Gross sales (March 3, 2pm ET, 11am PT).