Do Stock Options Make You Feel Taxed?
Did you ever get the feeling you paid too much in taxes? Probably every paycheck, right? Did you exercise stock options or restricted stock last year? Exercise meaning, you bought the issuer’s common stock at the grant price or the price set by the option. This purchase was regardless of the stock’s price at the time you purchased the option. If so, then you should read the rest of this blog post.
Brokerage House Reporting Requirements
Brokerage house reporting requirements have changed a lot these last couple of years. A few years ago, the IRS created Form 8949 as an addendum to Schedule D. You can now list each individual stock transaction whereas in the past you were only able to summarize them on Schedule D. This seems unnecessary; however, it probably cut down on many tax returns being flagged for failing to report stock sales. Why? Because grand totals on Schedule D are difficult for IRS computers to recreate. Nevertheless it is still one more form that needs to get filled out.
Later came the requirement for brokerage houses to keep track of and list your cost basis. This has been great in most cases, saving taxpayers the trouble of having to research what they paid for a stock. In the case of the Disney stock you were gifted by your great uncle’s other brother who got it from their second cousin once removed, you are still out of luck. No one knows what the cost basis of that stock is. But is the case of stock or mutual funds with re-invested dividends that have been owned for many years, the cost basis reporting requirements are very helpful even if they only have partial records.
A Change to the Change
Finally, there was a change to the change; this is the reason you are reading this article. This year, the cost basis that is being reported on Form 1099-B is the grant/exercise price for stock options. Now here is the problem; when you exercise the stock options, the gain is being treated as W-2 pay and is being taxed as such. If you are also paying capital gains tax, you are paying tax twice on this income. This can mean a tax as high as 101%. Why so high; let’s look at the example:
- Exercise 1,000 shares
- Grant price: $10/share
- Actual share price: $25/share
Your W-2 will include $15,000 from the exercise of the stock options. If we use the highest marginal tax rate of 39.6% Federal Tax + 1.45% Medicare Tax + 0.9% ACA tax + 5.15% Massachusetts Income Tax, the total comes to 47%.
Your 1099-B will show a short term gain of $15,000. This will now be taxed at a Federal rate of 39.6% + 2.8% NII tax +12% Massachusetts Short Term Capital Gains Tax; the total comes to 54%.
- 54% + 47% = 101%
Let’s Take a Closer Look
Did this happen to you? Here is one quick check that you can do without having to use scientific methods and techniques to analyze your finances. Look at your W-2; is there a figure next to ‘Box 12 Code V?’ Now look through your tax return and find Form 8949 and find the sale of the stock of the company you work for. Is the gain in column (h) almost the same as box 12 code V?
W-2 Box 12, Code V:
Form 8949, Column (h):
Note that the figures will rarely be an exact match because of processing fees. Stock awards are not always listed in Box 12. If there was a large capital gain on the stock of the company you work for, I would be suspicious as well.