NUA Stock Sale and 3.8% NIIT

[Stinson957C]

I have NUA (net unrealized appreciation) stock from my employer which was distributed last year (Sept, 2022). I paid ordinary income tax on the cost basis, which was reported in Box 2a of my 1099-R. I have already sold some shares in 2023, so the difference between the cost basis and the value at the time of distribution is subject to LT capital gains while the difference between the value at the time of distribution and the value at the time of sale is subject to ST capital gains. TurboTax does not appear to have provision to handle this. In another thread, it was suggested to report the sale as both a ST and a LT capital gain, along with a note of explanation. An additional problem that I have is that the sale of NUA stock is NOT subject to the 3.8% Net Investment Income Tax (NIIT) per IRS rules, yet TurboTax ignores this and calculates the 3.8% NIIT. Am I missing something or does TT not have provision for this tax situation? If the latter, I can no longer be a TT user. Thank you in advance for any help.

[Mike9241]

as to the NIIt tax

this is from the instructions for form 8960 where the NIIT tax is calculated.

Net gain attributable to NUA in employer securities held by a qualified plan. Any gain attributable to NUA (within the meaning of section 402(e)(4)) that you realize on a disposition of employer securities held by a qualified plan is a distribution within the meaning of section 1411(c)(5) and isn’t included in net investment income. However, any gain realized on a disposition of employer securities attributable to appreciation in

the value of your employer securities after the distribution from a qualified plan isn’t a distribution within the meaning of section 1411(c)(5) and is included in net investment income.

if its excludable the adjustment goes on line 5b of the 8960

Net Gain or Loss From Disposition of Property That Isn’t Subject to Net Investment Income Tax

Gain attributable to net unrealized appreciation (NUA) in employer securities held by a qualified plan.

Warming I could not see where the app ever asks about this type of adjustment to NIIT. however. I use a desktop version which has forms mode so i could go into the 8960 wks to enter the NUA adjustment.

online versions do not have forms mode.

[Stinson957C]

Hi Mike. Thank you very much for the clarification on the NIIT and especially for the workaround by manually going into forms mode. I really appreciate the help, although Intuit really needs to address this. 

[kheshgi4]

I will have a sale of NUA stock in 2024 which will have a NIIT exclusion as well as STCG.  For the NIIT exclusion, I hear that I would not be able to use the TT online version and need to use the TT desktop version by editing a form.  I also understand that I would need to then not file electronically if using form editing. Would this apply to both federal and state (NJ) or could i still file state electronically?

[taxdean]

Did you get a response as to how to handle the short-term and long term gains and losses from sales after doing an NUA?  Also, regarding the prior replies in this thread, is it still necessary to do a manual workaround so that the NUA gains are exempt from NIIT?  Thanks!

[Romper]

Search for the following:

NUA Overriding The 3.8% Net Investment Income Tax.

It shows how to remove the LTCG from the 3.8% NIIT

[taxdean]

Thanks much, Romper!  I did the search and it looks like you are asking others if your procedure is the correct way to do it.  Does that mean you are not sure that it is?  Also, and I note that I DO have the desktop version, I thought I read something about using it would not allow one to file electronically - which confuses me because I have used that version to file electronically in past years.  Perhaps, it has something to do with how you have to manually edit in forms mode.  Can you address that as well, please?

[Romper]

Hi Taxdean..

Yes, I was asking for confirmation from others but there's been no response so far.

From my research, I am confident the procedure I described is correct. I noted I was using TT-2024 Premier desktop because TT-2025 is not functional yet. 

Regarding having to mail the return...

I encountered that initially when I tried to override the values on Form 8960 and elsewhere.

Once I discovered the change needed to be made on the Form 8960 Worksheet, Line 5b, the results fed to the related forms.

The Federal and State Review passed without difficulty and the steps to electronic filing also worked as it has in the past. 

I'll call your attention to the instructions for Form 8960 for 2024, Page 7. The instructions for Line 5b (near top of column 2) states the user should override the value on Line 5b on the Form 8960. Doing it there results in an error message during the review. Changing it on the section for Line 5b the Worksheet for 8960 did work.

Reply if clarification is needed.

I invite TurboTax to reply to my original message.

[taxdean]

That does seem to work, thanks much, Romper!  Obviously, at this early date, I am also having to use the 2024 Turbo Tax before pulling the trigger before year end 2025.  Since the stock has appreciated quite a bit in the year plus since I executed the NUA about 13 months ago, I guess it is only most of the LTCG that is exempt from NII so I need to factor the LTCG by the ratio of the value at NUA divided by the value I sell at, and use that as the manual entry, I guess, right?  And since I didn't think to turn off dividend reinvestment, I assume I can choose to not sell those shares that would produce a short-term capital gain, right?  (although I may have a small short-term capital loss from my tax loss harvesting).  If I turn off the dividend reinvestment now, I would probably eliminate any STCG on all the shares in another year, right?  Actually, I am not selling all the shares this year anyway, just enough to top off my LTCG bracket, which will be my plan for 2 or 3 years more, also.  I assume that makes sense.

[Romper]

Mike9241

Ref your comment...

"if its excludable the adjustment goes on line 5b of the 8960"

I found that if you are using TurboTax Premier Desktop, you will get an error if you override the value on Line 5b on 8960.

You need to enter the amount on the WORKSHEET for Form 8960. There's a line item in the section for Line 5b that states "Net gain or loss from disposition of property not subject to net investment tax".

Enter the value there and it feeds to Line 5b on 8960.

[Romper]

taxdean

I struggled for some time to figure how to report the NUA.

One day it dawned on me that it's far simpler than what I was and you are thinking.

I invite others to respond but here's what I did.

My research came to the conclusion you only report the NUA amount from box 6 on your 1099-R regardless of the time held or the value at the time of the sale.

Step 1

• Determine how many shares you have to sell at the current price to equal the dollar amount of the NUA in box 6 of the 1099-R. Then sell those shares and report the sale as follows.
• The sale is reported under Investment Income, Stocks as a 1099-B, not in the section Retirement/1099-R. The 1099-R would have been reported in the section Retirement/1099-R in the year you took the NUA.
• NUA's are taxed as LTCG regardless of the time held.
• Report the NUA amount from box 6 less your cost basis from the 1099-R, box 2a on the Form 8960 WORKSHEET in the section for Line 5b - Adjustments. On the last line titled "Net gain or loss from disposition of property not subject to net investment tax".

Step 2:

• For the shares sold that were from transactions in addition to and following the date of the NUA, I made a new stock sale entry for those shares in TTax. I reported those also under Investment Income, Stocks as from a 1099-B. Mine were all LTCG which I sold on a single date. If you have sales on different dates or with STCG you'll have to make another entry for each sale date.
• I reported the purchase date as Various.

[taxdean]

So, is the intent to make Step 1 be the amount that is exempt from NII and Step 2 is the amount that is totally subject to NII?  Isn't that going to cause a conflict versus the numbers on the forms the broker will send me after I see the stock and, if so, are you saying it doesn't matter?

Separately, I am not sure you correctly described the mechancs of Step 1.  Suppose the stock at NUA time was worth $600k and the cost basis was 100k, so the NUA is 500k.  It seems that your Step 1 says to use 500 - 100 = 400k as the entry not subject to NII, but I would think it is the entire 500k that is not subject to NII.

After we get through this, I will need to adjust for the fact that I am not selling all the stock in one year (and that i probably want to avoid selling the shares due to reinvested dividends after the NUA date, but let's table that for the moment.

Thanks again for all your help!  

[Romper]

taxdean

Yes, you've interpreted Step 1 correctly. No NIIT on the sale of the NUA shares.

Regarding the year end statements from the brokers:

We will have to see how the brokers report the sale on their 1099-B for 2025. 

For shares I sold prior to selling the NUA shares, there was no indication on the 1099-B that they were related to a prior 1099-R.

My solution is:

NUA Shares:

1. Report the sale of the NUA shares under Investment Income, Stocks using the basis and proceeds from the 1099-B.
2. There is a box near the bottom titled "The cost basis is incorrect, etc.".
3. Check that box, press Continue and enter the Actual Cost basis two screens later. I.e. From Box 2a on the 1099-R.
4. On the Worksheet for Form 8960, enter the "Not subject to NIIT" amount as noted earlier. 

Shares Subject To NIIT:

1. Add a new sale(s) for those shares using the basis and proceeds as reported on the 1099-B. 
2. The NIIT does not start until your MAGI income exceeds $200k single or $250k married. 

Regarding The Taxable Amount Of The NUA:

My error, you are correct. Thankyou for catching that.

The entire NUA amount from the 1099-R is taxable as LTCG. The entire amount is also Not subject to  NIIT on the Worksheet for Form 8960.

I will go back and correct my prior postings.

Looking forward to any further feedback from you or others.

[Romper]

taxdean

I reviewed my original posting and found several errors.

I've corrected the errors and revised it for clarity.

If you have time, take a look and see if you agree.

NUA Overriding The 3.8% Net Investment Income Tax

Thanks in advance

[taxdean]

I'm not sure where the correction is. Can you clarify on what date and whether you simply retroactively edited the wrong answer into the right answer so that the wrong answer no longer exists.  Thanks.