Income tax sound right?

[Venturer]

DW and I have used the AARP tax service for the last 3 years with no problem. This year is differant because we had to go in with appointment,be the only one in the room and after showing all our info to them, leave everything and come back a week later to pick them up. All worked good but I'm worried about the numbers. We sold 34k of stock lst year that I had bout using ESPP from my 25 year company. I started buying when it was $15. per share and when I left it was over $1k a share. I knew I would have to pay tax on the gains. Other than interest on savings and a little income less than $200. from dividends we only had SS & pension income of 52k + the capital gains from the $34k of stock sales. We were expecting to pay tax but they said that because our earned income was so low that we were in the 0% tax bracket on the stock sale and we also got back all the tax wehad paid in. We were in shock to be getting back over $4k from Fed and a little from state. I am just worried that this might be wrong, I think the people there have a lot of training and if they are right it is great but if not I don't want the tax man coming after me to fine us. Will we be ok? Thanks in advance.

[Alan]

That sounds right to me.

https://www.irs.gov/taxtopics/tc409

Quote:

Capital Gain Tax Rates The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than $80,000.

https://www.nerdwallet.com/article/t...ains-tax-rates

[nobody]

If I recall correctly married couple with income less than 80k is 0% on capitol gains. Once you take off standard deduction you should be under that.

[pb4uski]

+1 If your total income for 2020 is less than $107,400 for a married couple over 65, then and you are well under that from what you wrote in the OP, your taxable income would be less than $80,000... the capital gains rate is 0%.. so $0 tax makes sense.

Congratulations!

[cathy63]

Quote:

Originally Posted by Venturer ... We sold 34k of stock lst year that I had bout using ESPP from my 25 year company. I started buying when it was $15. per share and when I left it was over $1k a share. I knew I would have to pay tax on the gains...

This is the part that concerns me a bit. When you buy stock through an ESPP program, you usually get a discount on the purchase price of about 15%. When you sell the stock, no matter how many years later, that discount has to be treated as ordinary income, not capital gains. Any return that has this type of stock sale is "out of scope" for the AARP program, so if they knew how you acquired this stock, they should not have agreed to do your return.

If you were in the type of ESPP program where you did not get a discount on the stock when you purchased it, then your return is accurate. Otherwise, you probably do owe a little bit more in tax, but as far as I know, there's no way for the IRS to connect the dots and fine you.

[gauss]

Quote:

Originally Posted by cathy63 This is the part that concerns me a bit. When you buy stock through an ESPP program, you usually get a discount on the purchase price of about 15%. When you sell the stock, no matter how many years later, that discount has to be treated as ordinary income, not capital gains. Any return that has this type of stock sale is "out of scope" for the AARP program, so if they knew how you acquired this stock, they should not have agreed to do your return. If you were in the type of ESPP program where you did not get a discount on the stock when you purchased it, then your return is accurate. Otherwise, you probably do owe a little bit more in tax, but as far as I know, there's no way for the IRS to connect the dots and fine you.

Cathy,

As an AARP TaxAide volunteer, your comment did strike a bit of concern in me as I do not recall ever noticing one of these types of sales -- and I pride myself on being a bit of a "scope nerd" at our site.

I did some further research, and found this document from Fidelity that addresses taxation of ESPP distributions.

On a quick scan of the document, it looks like if the employer were to report the "ordinary income" part of the distribution on W2 box 1 (Wages, tips, other compensation), then I believe the return would be in-scope as the employer has done the heavy lifting. As such, the return would likely have been prepared correctly.

If it were not broken down like that on a W2, then I agree that it would be a problem.

This all assumes that the gains were correctly reported on the 1099-B and netted out the income portion reported reported on the W2.

Thanks for pointing out the issues with taxation of ESPP distributions.

-gauss

[Venturer]

Thanks y'all, When I left the company and they sent me a tax certificate they did the employee withholding tax. I had sold some once before when my daughter got married and they did it the same way then. I had the paper for my actual buy price on the differant dates of exicution so I guess I am good, and yes my return was joint with my DW and no itemizing. I just wanted some reassurance(for DW)

[Venturer]

Gauss you said-- On a quick scan of the document, it looks like if the employer were to report the "ordinary income" part of the distribution on W2 box 1 (Wages, tips, other compensation)
And that was the only thing on that line because they sent me a W2 for it.
Thanks again.

[gauss]

Quote:

Originally Posted by Venturer Gauss you said-- On a quick scan of the document, it looks like if the employer were to report the "ordinary income" part of the distribution on W2 box 1 (Wages, tips, other compensation) And that was the only thing on that line because they sent me a W2 for it. Thanks again.

Thanks Venturer, but lets wait until cathy63 weighs in on this interpretation, before we open then Champaign, as she is obviously more familiar with this tax topic then I am.

-gauss

[cathy63]

Quote:

Originally Posted by gauss Cathy, As an AARP TaxAide volunteer, your comment did strike a bit of concern in me as I do not recall ever noticing one of these types of sales -- and I pride myself on being a bit of a "scope nerd" at our site. I did some further research, and found this document from Fidelity that addresses taxation of ESPP distributions. On a quick scan of the document, it looks like if the employer were to report the "ordinary income" part of the distribution on W2 box 1 (Wages, tips, other compensation), then I believe the return would be in-scope as the employer has done the heavy lifting. As such, the return would likely have been prepared correctly. If it were not broken down like that on a W2, then I agree that it would be a problem. This all assumes that the gains were correctly reported on the 1099-B and netted out the income portion reported reported on the W2. Thanks for pointing out the issues with taxation of ESPP distributions. -gauss

Here's the relvant part of the scope manual:

Quote:

Form 8949 Not in scope for: • Determination of basis issues: ─Basis of any asset acquired other than by purchse or inheritance, such as a gift or employee stock option, unless the taxpayer provides the basis and holding period

I guess if the taxpayer really knows the basis then we would do the return, though as far as I know we've never seen ESPP sales at my site. What I know about them comes from dealing with mine and DH's. The main concern I would have at an AARP site is whether the taxpayer actually knows how to calculate the basis or if they just come in with a 1099-B and W-2 and don't realize that there's more to it.

For example, let's say you have the following conditions.

Offering period: Jan 1 2010 to June 30 2010
Stock price on Jan 1: $10
Stock price on June 30: $20
Discount 15%
The per-share price will be $8.50 on June 30 2010.

Now assume the taxpayer sells one share in 2020 (ten years later, so it's a qualified disposition) for $100.

The broker will report the cost basis as $8.50 and a long-term gain of $91.50. If the employer is made aware of the sale, then they will issue a W-2 for $1.50 (or maybe a 1099-NEC if you are no longer employed there). If the employer doesn't know about the sale or has gone out of business, then it's still the taxpayer's responsibility to report the ordinary income.

The main problem is that the cost basis is not what's on the brokerage form. You have to add the amount from the W-2 to the amount that's on the 1099-B and report the adjusted cost basis as $10 and the LTCG as $90.

[cathy63]

Quote:

Originally Posted by Venturer Gauss you said-- On a quick scan of the document, it looks like if the employer were to report the "ordinary income" part of the distribution on W2 box 1 (Wages, tips, other compensation) And that was the only thing on that line because they sent me a W2 for it. Thanks again.

Since you did get a W-2 for the ordinary income, and since all your LTCGs are in the 0% bracket, it sounds like your total tax was calculated correctly.

If you had owed tax on the LTCGs, you would have overpaid if you didn't adjust the cost basis by adding the amount on the W-2 to the amount you originally paid for the stock.