Did you get offered company stock options in 2021?? If so, congrats! If you bought or exercised your stock options, then you need to watch for these common tax pitfalls when filing your taxes.
There are a lot of different acronyms and names out there when referring to this kind of employee stock compensation like NSO, ISO, RSU, IPO, ESPP, etc and it can get confusing! The number one mistake that can be made is not understanding what type of stock options you have and what the tax ramifications are associated with your options.
If you are working with a financial advisor and tax professional this tax season, hopefully, they have this covered. However, it’s always good to double-check your tax filing documents and understand your tax calculations as mistakes can happen. If you are filing your own taxes, these are common mistakes TurboTax and other tax software tend to miss:
Double counting your income: If you exercised non-qualified stock options, the discount you received (the difference between market value at exercise and what you paid) is included in your compensation and subject to income tax. When you are filing your taxes, you don’t want to report this income separately from what your employer reports as your W-2.
Not reporting the cost basis correctly: Your brokerage firm will provide you with Form 1099-B at the sell of your stock options and may not accurately report the cost basis of the sale. Some brokerages might leave this box blank or $0 which would leave you paying way more in taxes than you should. You can find this listed on Box 1e. This is why it is important to document all aspects of any transaction regarding your stock options.
Failing to use AMT Credits: If you exercised ISOs previously and held them, you get a tax credit in the following years. You don’t even need to sell the stock to start using up your AMT credit! Form 8801 is what you need to complete every year until the credit is used up. Form 6251 will be what you use when you do sell the stock to avoid paying or calculating more AMT than is required for your ISO sell.
Not tax software related, but a very common mistake made by those with stock options:
Not being prepared for your tax bill: It’s important to never assume that your tax withholdings will be enough to cover your tax liability. AMT comes into play with ISOs and withholdings from other options are withheld either at 22% or 37%, which could be too little or too much depending on your tax situation. No one likes a surprise tax bill, which is why it’s important to be aware of the taxes associated with each of your options.
Stock options are an awesome employee benefit (congrats on receiving them!!), but making sure you understand the taxes associated with them and how they flow on your tax return is important so you don’t end up with an incorrect tax bill. Surprises and overpayments are two words one does not want with their taxes :-)!