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Welcome to the 53rd edition of the Tech Financial Planning (TFP) newsletter.
If you have company stock, please, please, pretty please, make sure you report the correct cost basis.
It can be the difference between owing $7,000 and owing $10 (aka tipping the IRS).
I was chatting with someone earlier this week on LinkedIn and they were doing their taxes in TurboTax and they were surprised with how much taxes they still owed.
They thought that Procore was taking out enough in taxes and yet Turbo Tax was showing that they still owed a significant chunk.
Note - this isn’t a Procore issue, this is a specific IRS regulation and will apply to anyone who has company stock.
Fortunately this person recognized that this might not be correct.
As you can see in the conversation, if you only put in the 1099 from etrade, it will be wrong and you will pay more than you need to.
You need to adjust the cost basis, and that information will be on a form from etrade called Stock Plan Transactions Supplement (if you have a different custodian, it may be called something different).
I’ve written before how even if your company took out taxes, you still might owe (not the case in this situation) and how you can avoid paying double taxes (this was the case here).
Candidly, it seems really silly that this is even a thing, because in many cases, you’ve already paid some or all of the taxes.
Yet if you report it wrong, you will accidentally pay it again - which you shouldn’t!
In this case, it was the difference between owing $7,000 and owing $10.
I’ve seen situations where it’s even more - last year I had a client who didn’t adjust the cost basis at first and would have paid over $30,000 in tax that they didn’t need to.
Fortunately we caught that one, but almost every tax season I see someone not get the cost basis right.
Putting It All Together
I wouldn’t count on the IRS magically telling you that you got it wrong.
If you did it wrong in the past, you can file an amended return.
But this is a situation where an ounce of prevention is worth a pound of cure.
A good tax preparer and/or financial advisor who knows equity compensation can make sure you avoid this each year.
Each year, before tax season (January / February) I send my clients a note with what tax documents they should look out for.
For my clients with equity compensation, I include a note in the body of the email that says:
“Please remember that because you received RSUs and sold company stock, you will need to download both the 1099-B AND a supplemental form - often called something like a Stock Plan Transactions Supplement or similar. This is important because the cost basis on the 1099 itself will almost always be wrong, and if that's all you go off of, you may pay more in taxes than you need to (aka you could pay taxes twice!).”
Then they get a document that includes specific notes and things to watch out for - see the screenshot below for an example.
And then if client’s want me to (and I recommend they do!),I will review their tax return to make sure everything got reported correctly, and to look for planning opportunities.
If you’re going to do it yourself, make sure you get it right.
You already pay the government enough in taxes - don’t leave them a tip.
If you are looking for a financial planner who specializes in equity comp and want to make sure you aren’t tipping the IRS, schedule time here.