How do I add ESPP ordinary income that was not included in my W-2?

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cindy990
cindy990 Member Posts: 1 Newcomer

As for Qualifying Dispositioned ESPP, my company does not include the discounted price in the W2. How can I add it as a compensation income in FreeTax USA?

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  • Henry
    Henry FreeTaxUSA Agent Posts: 86
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    Hi cindy990, a qualifying disposition generally happens when you sell the stock at least two years after the grant date and at least one year after the exercise/purchase date. In this situation, the discounted price is considered compensation that is taxed as ordinary income on your Form 1040. Any additional profit gets reported on Schedule D and is taxed at the lower long-term capital gains rates.

    -You can account for the capital gains by selecting Income > Common Income > Stocks or Investments Sold (1099-B) from the menu. As you are entering information about the transaction, you should enter the information as it appears on the Form 1099-B that you received. If the basis shown there does not account for the discount price that you are reporting as income, you will want to be sure to make that adjustment on the following screens.

    You will be asked if you have adjustments to this investment sale. If you answer yes, then you can select "The basis shown in Box 1e is incorrect." On the subsequent screen you will be prompted to enter the correct basis amount. You will want to enter there the actual price paid for the shares plus the discount price.

    -When it comes to accounting for the discount price as ordinary income, the IRS instructions (see pg 13) say that you must include in your income as compensation the lesser of:

    • the excess of the FMV of the share at the time the option was granted over the option price, or
    • the excess of the FMV of the share at the time of the disposition over the amount paid for the share under the option.

    If that compensation (the discounted price) wasn't included on your W-2, then you'll need to account for it elsewhere. The Schedule 1 instructions indicate that any income from the exercise of stock options not otherwise reported on Form 1040 can be reported on line 8k. Unfortunately, our software does not currently support that option, so you would need to find another way to prepare your tax return this year if you want to report an amount on line 8k.

  • Larry88
    Larry88 Member Posts: 3 Level 3
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    Not the answer I wanted to see to Cindy's question after entering all of my information into FreeTaxUSA, but informative. Now I will need to find another tax reporting app for this year and start over.

  • Knight42
    Knight42 Member Posts: 2 Level 2
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    Did you ever find another tax app that supports this? In the same boat.

  • Larry88
    Larry88 Member Posts: 3 Level 3
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    Disclaimer I am not a tax expert. I entered all my tax info into OLT and TaxAct as well as FreeTaxUSA and eventually got all three to come up with the same numbers and forms. Depending on the app or technique utilized the discount number could end up on the 1040 in line 1h. However I will only explain how I did it in FreeTaxUSA. This tax situation is a confusing one. After many hours of research online it appears that all one needs to do in FreeTaxUSA is enter the total amount of discount accumulated from your entries of your stock lots that were sold with the appropriate adjustments to the cost basis for the discount at purchase. You either have to calculate that cost basis adjustment from your original Form 3922 from your employer for your lot purchases or your Form 1099-B may have some supplemental information that has the adjusted cost basis information as well. The supplemental info should match calculations from the Form 3922. I assume you know how to calculate the discount based on your ESPP Plan and the holding period etc. and enter them correctly while entering your 1099-B information? You have to make the Cost Basis Adjustments in FreeTaxUSA under the Tell Us More Information About the Sale page under Adjustments to Gain or Loss, Yes and Box 1e is incorrect and then the Adjusted Cost Basis is entered on the following page. You can then enter the total accumulated discount amount into FreeTaxUSA under Uncommon Income - Other Income - Miscellaneous Income and enter a description ESPP STOCK SALE and the amount. This should match the total negative number on the generated Schedule D in line 8b column G and Form 8949 Total in column G in my case. This same positive number will end up on the 1040 in line 8 Additional Income and in turn a Schedule 1 on line 8z with the description you entered. The discount will be taxed as Ordinary Income and the rest as Capital Gains. Here is a link to comments from another app community that support this method. Hopefully this isn't too confusing. https://ttlc.intuit.com/community/taxes/discussion/how-do-i-add-espp-ordinary-income-that-was-not-included-in-my-w-2/00/1331925

  • Larry88
    Larry88 Member Posts: 3 Level 3
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    I see I didn't reply properly. See my subsequent post in the thread. Taxact handled things reasonably well, but they are not cheap to use. OLT was cumbersome, but I eventually got there. I finally figured out a way to use FreeTaxUSA and am going with that since I won't need to keep switching my Tax app and renter info as I won't have any ESSP sales in the future.

  • Knight42
    Knight42 Member Posts: 2 Level 2
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    Amazing. Will try this today FreeTaxUSA. Like you, I'd rather not switch. Thank you!

  • aswar002
    aswar002 Member Posts: 1 Newcomer
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    I think this is one feature that should be considered important for next year tax forms on Freetaxusa. Lot of folks end up with an incorrect W2 due to self reporting/poor communication between Brokerage and employer etc required to get the Ordinary income from ESPP lot reflected on W2.

    I transferred my ESPP stocks out of stock plan on E-trade to my brokerage account. They don't update the supplement form issued as part of tax documents for Stock plan with transferred out ESPP stocks. This led to my company not updating my W2 with Ordinary income earned from those ESPP lots. The IRS instructions are pretty clear about how to go about updating the Ordinary income, so I would expect one can easily add prompts to cover this case on Freetaxusa.

  • KeriC
    KeriC FreeTaxUSA Agent Posts: 93
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    This discussion has been great. I am going to pass on the feedback to our developers to see if this is something we can properly support reporting in the future.