IRS Form 1040 changes include where you report capital gains
The 2021 tax season has started. When you dig into your tax return to report income for 2020, you will notice that Form 1040 has changed again. In 2018, the IRS dramatically condensed Form 1040, completely reorganizing the previous traditional version and introduced additional schedules that funnel information to Form 1040. Although the IRS has not changed Form 1040 2020 in such a way. drastically, there are some differences from last year’s form that you need to know.
Below, I explain the main tax reporting topics that may apply to executives and employees who earn income from stock compensation, such as stock options, share units. ‘restricted stock or an employee stock purchase plan (ESPP) or who have earnings from the sale of company stock. .
The changes at a glance
- After being condensed to just 24 lines in 2018, the IRS Form 1040 for 2020 expanded to 38 lines.
- The new lines include those for Recovery Rebate Credit and for estimated tax payments, sometimes made by taxpayers who have equity compensation.
- The total capital gain or loss from Schedule D is shown on a separate line on Form 1040.
- The totals from Schedule 2 and Schedule 3 are entered on different lines of Form 1040. This applies to anyone with incentive stock options (ISO) which triggered the alternative minimum tax (AMT).
- For non-employees, such as outside directors receiving equity grants, income is now reported on IRS Form 1099-NEC, not Form 1099-MISC
Capital gain or loss
If you sold shares in the 2020 tax year, you enter each sale on Form 8949 and report the total on Schedule D. You now report that total from Schedule D on Line 7 of Form 1040.
This was moved from line 6 on the 2019 form, making it the third consecutive year of capital gains reporting changed on the 1040 form.
Alternative minimum tax
A concern for anyone with ISOs, the Alternative Minimum Tax (AMT) is calculated on Form 6251. The difference to the ISO exercise, when the shares are held throughout the calendar year of exercise, is reported on line 2i.
When the ISO stock that triggered the alternative minimum tax is sold, the difference to the regular tax is reported on line 2k. You enter your calculation from Form 6251 on line 1 of Form 1040 Annex 2 (“Tax”). You attach Form 6251 to Schedule 2. The totals for Part I of Schedule 2 go to line 17 of Form 1040. This has changed from line 12b of Form 2019.
the AMT credit that is generated for an ISO exercise that triggers AMT is retrieved by Form 8801, Like in the past. The amount from line 25 of Form 8801 is entered in Annex 3 (“Non-refundable credits”) on line 6 (tick the box b). Totals from Part I of Schedule 3 go to line 20 of Form 1040. This has changed from line 13b of Form 2019.
Recovery rebate credit
To mitigate the economic impact of the pandemic, Congress provided two stimulus checks / economic impact payments that were based on income from 2019 tax returns (or 2018 if your 2019 return was not available for the first check). The amount received for the first check and / or the second payment is phased out on the basis of the previous year’s income.
Due to peaks in income from stock compensation over the past few years, you may not have qualified for this federal assistance, even though you were laid off or on leave in 2020. If that is yours Instead, you can claim the recovery refund credit on line 30 of Form 1040.
Another good news is that you don’t have any clawback from the stimulus checks you received, if your 2020 income is higher than in the past, perhaps (again) because of the stock compensation or stocks you sold after your company went public. See Form 1040 instructions for the recovery reimbursement credit worksheet. If you have received IRS Notice 1444 (“Your Economic Impact Payment”) for the first stimulus check or IRS Notice 1444-B for the second, have them available when you complete the worksheet to perform the calculation.
The federal package additional hold that applies to stock-based compensation, such as the acquisition of restricted shares or RSUs (22% and 37% for amounts over $ 1 million), may not cover the actual taxes you owe depending on your marginal tax rate. You may then have paid estimated taxes. On the 2020 1040 form, estimated tax payments are now reported on line 26. This differs from last year, when they were reported on Schedule 3.
Cost Based Reporting Rules for Share Sales
For stock sales, there is still no change in the IRS rules on how the cost basis information is reported on Form 1099-B and Form 8949. For grants awarded in 2014 and subsequent years, brokers are prohibited from including equity compensation income (which appears in Box 1 on Form W-2) as part of the base cost reported on Form 1099-B. This creates confusion and complications when it comes to tax reporting, as only the cost of exercise (i.e. what you paid for the shares) appears on the 1099-B. To avoid the risk of paying too much tax, you must make an adjustment on Form 8949.
This means that for Restricted Shares / RSUs, the base price reported on Form 1099-B is zero or the box is left blank. However, the correct cost basis is the value of the shares at the time of acquisition. This is what you must report on Form 8949.
Additional tax reporting resources
For advice on filing income tax for stock compensation and sales of company shares, including annotated diagrams of Form W-2, Form 8949, Schedule D, Form 3921, and Form 3922, see Tax Center on myStockOptions.com.