Are you required to correct/increase the cost basis for ESPP sales?

[stormrunner11]

I originally entered the cost-basis into TurboTax as indicated on the 1099-B. However, if I manually correct the cost basis in TurboTax (increasing the cost basis to include the employer paid portion), the amount of my eligible retirement's saver credit decreases.

I understand that this is a very odd situation - but if you can believe it, by declaring less income (as a result of increasing my cost basis for the ESPP sales), I am actually financially hurt. 

As a result, I am asking: Is it required to manually correct (increase) your cost-basis, or can you just enter what's provided on the 1099-B? 

Note: I understand that it's likely required to manually decrease the cost basis, but I am asking about increasing (and thus reporting less income)

[dmertz · Accepted solution]

The Retirement Savings Contributions Credit is a nonrefundable tax credit.  If increasing your cost basis is sufficiently reducing your income tax, the credit is reduced to keep Form 1040 line 56 from going negative.

[stormrunner11]

Thank you dmertz - that's a great explanation. However, does that mean I am still required to increase the cost basis?

[dmertz]

Yes.

[stormrunner11]

Thank you dmertz - I appreciate your help.

[AmandaR1]

Yes, you are required to report the correct cost basis even when it differs from your 1099-B. In these situations, the 1099-B issuers aren't required to report the correct cost basis but the IRS does expect you to correct it. 

[stormrunner11]

so, even in the case of manually correcting it to report less income, it is required?

[AmandaR1]

Correct, a super user is replying here as well, so you can confirm with his answer. The IRS knows the 1099-B issuers aren't required to report your actual cost basis for employee stock situations. You are required to report the actual cost basis for the IRS. It is unusual that it would hurt you because having a smaller capital gain would typically offset the retirement credit, so be sure to continue out of the entire section before evaluating your results.

[stormrunner11]

Thank you TurboTaxAmandaR. I understand it's unusual, but Yes, I am positive that the results reduce the credit (my federal income taxes are unaffected because I am already receiving a 100% refund).