Prepared or not, tax return reporting was amended once more for the 2020 tax year. The IRS considerably fused the Form 1040 in 2018 which results in a total reconstruction of the old conventional version of it, they also presented additional schedules that carry information to Form 1040. Although in the year 2019, IRS did not make significant changes in the Form 1040, there have been essential variations particularly in the process of reporting capital gains.
Do not forget to file your tax return on or before April 15, 2020! But before that, here are some tax return tips to be remembered for executives and employees who earn income through stock salary: stock options, restricted stock units, or an employee stock purchase plan (ESPP) and those who have earnings from company stock sales.
1. There will only be three numbered schedules (supplementary forms) of Form 1040 which are Schedule 1, 2 and 3.
2. Taxpayers who are born before January 2, 1955 can avail the new tax return for seniors ("US Tax Return For Seniors" )in the IRS Form 1040-SR . Despite the existing itemization of deduction in Schedule A, it is not necessary to open the instruction because the new tax return has big, easy-to-read fonts and already contains deduction chart for the convenience of these taxpayers.
3. In 2018, the Tax Cuts & Jobs Act, the major tax law continuously changes the tax rates, rules, and itemized deduction limits in particular. On the other hand, in the last quarter of 2019, the SECURE Act amended the tax rates claim for a child’s unearned income which is beyond $2,200, this will be applicable to taxpayers paying for kiddie tax.
Take note that there are 24 lines in the 2019 IRS Form 1040. Line 1 entry is Stock compensation, like those from the operation of non-qualified stock options (NQSO) or the purchasing of restricted stock units, together with salary income and cash bonuses.
Box 1 of the W-2 grouped the employee’s compensation income from all sources. Your company may freely determine what portion of your W-2 income comes from stock comp if in case you are not sure about it, they will indicate it in Box 14. Meanwhile, Box 12 is required to be filled by your company for non-qualified stock options and non-qualified ESPPs. Compensation income for Medicare Wages will show on Box 5, while in Box 3 for Social Security Wages with a maximum limit of $137,700 for 2020 much higher than in 2019 which is only $132,900.
All employee stock compensation income not stated on Form W-2 will be reported to Schedule 1. Along with a brief description of the reported income, it will be in Line 8. In 2018 tax return, Schedule 1 is reported in Line 21 but in 2019 returns it changes to Line 8.
Input in Form 8949 each sold shares you have within the tax year 2019 and report on Schedule D the total capital gain or Loss. Instantly, whatever the total on Schedule D will also be reflected in Line 6 of Form 1040. It is contrary to last year’s reporting wherein Schedule 1 instead of Form 1040 is where you will enter the total capital gain or loss.
The IRS made a sensible shift in putting back the reporting of capital gains on Form 1040. Reporting the gain and loss immediately in the Form 1040 tax return was not the case for last year’s tax season. Rather, for the 2018 tax year, the overall capital gains from Schedule D was reported in the recently developed Schedule 1, furthermore, the totals of the said schedule will be passed through the amended Form 1040. Meanwhile, in the new Form 1040 for 2019 tax season, the total capital losses or gains will not be reported in the schedule thus, it will be placed back specifically in Line 6 of the form.
The IRS was condemned for last year’s capital gains reporting procedure because it resulted in confusion and became detested. On the other hand, there was a strong political pressure put in the IRS in fabricating the "postcard-sized" tax return to accord with the reforms on federal tax that was made in the same year.
Form 1040 reporting amendment was equally inventive and detrimental. After the early “product” failure, the IRS made a move to gain back the trust of its taxpayer’s by listening to their feedback. Public comments and feedback from bloggers were thoroughly balanced by the agency. In the end, they come up with the conclusion that the removal of some lines in the two full pages of the Form 1040 and the distribution of these lines in attached scheduled brought additional confusion for taxpayers, tax preparers, and financial advisors with regards in understanding sources of income and tax returns. Criticizing the IRS is easy but finalizing tax returns is intricate and not fun, good thing is that at the end of the day, IRS branched out from the experiment in a nearly entrepreneurial manner while learning from it.
Freddie Cook, CPA