Did you take a really hard look at your 1099s this year? Did you pay attention to each line, showing what you paid for each holding and sold them for? Or did you just get the form and pass it along to your accountant or enter it into a tax preparation software?
If it was the latter, you are in the majority of people I talk to. Most of us trust that what is printed on that form is 100% accurate and should just be entered as is. Well, I have some not so great news for you. It may not be. Especially if you are an executive that receives stock as part of your compensation, like many of our clients.
This type of error on 1099s and making a mistake on your taxes is most likely to occur if you:
- Moved accounts from one custodian to another and they did not transfer your cost basis
- Sold investments that you owned prior to 2011 (cost basis reporting was not required prior to then)
- Sold stock grants that you received as part of your compensation
For those of you who receive stock as a bonus or part of your compensation, specially stock grants called Restricted Stock Units or Long-Term Incentives, this applies the most. Upon vesting you are able to sell those shares or hold onto them to sell at a later date. However, you are taxed, that year, on receiving those shares as income. So, you have just paid ordinary income tax on it, which is included in your W2.
But, what happens when you sell those shares? You will receive a 1099 from the brokerage company that holds them for you (Fidelity, Morgan Stanley, CompuShare…) and they will show your gain or loss, which you will have to pay capital gains on. Here’s where the big mistake can happen. I’ve witnessed many instances over the years where the tax form shows a cost basis of zero and the gain as the total amount you sold. That is not correct. You already paid income tax on it at that time it was granted and therefore your cost basis is the price the stock was given to you multiplied by the shares you were granted. Do not just input that value and trust it to be correct.
This just came up again this week in helping a client coordinate their tax preparation. If we had not caught this the client could have paid an additional tax, wrongly so, of over $135,000. Do not make that mistake.
As our advisors help clients with comprehensive wealth management, we have the advantage of seeing all aspects of their financial life and helping to ensure that mistakes like this are avoided as much as possible. If you aren’t sure if you are being given truly comprehensive wealth management advice or just want a second opinion, we would love to talk with you. Reach out to us today!