For ESPP, my W2 includes income for disqualified disposition, but not for qualified disposition, but turbo tax ask if entire amount is included or not, how do I handle it

[TomYoung · Accepted solution]

Somebody in TurboTax decided to eliminate the box that used to be on the "Your Employer Stock Plan Results" page of the program prior to 2015 that allowed you to tell TurboTax, "no, that's the wrong amount and here's the correct amount."  When that box was on that page you could inform TurboTax of the amount of compensation actually reported on the W-2.  TurboTax would then take the difference - the correct amount it calculated minus the amount reported on the W-2 - and make an entry to be included on line 7 of the Form 1040 for that difference.

You have a few different ways of going here.

1) If you've entered all your trades then the first way is to write down how much compensation is being reported with each Disqualifying trade and then deleting the Disqualifying trades.  Re-enter the Disqualifying trade or trades on the default "1099-B" entry form and simply correct the basis figure(s) reported by the broker.  (Click the blue "I'll enter additional info on my own" button.  On the next page enter the correct basis in the "Corrected cost basis" box.That will allow you to add the missing amount of basis and TurboTax will show all this correctly on Form 8949.) 

The Disqualifying trade or trades is/are now correctly reported: the compensation element is reported on the W-2 and you've used the correct basis for the sale, or sales.

That will leave only the Qualifying trades having been entered using  the ESPP step by step process and the compensation calculated by TurboTax will only encompass those trades.  Then when you get to that "Your Employee Stock Plan Results" page you would answer "No."  TurboTax will then make the correct adjustment to line 7 of the Form 1040 and those trades will have the correct basis reported on Form 8949.


2) If you've entered all your trades then the other way you could handle this is leave things as they are and answer "Yes" to TurboTax's question about the amount reported on your W-2.  TurboTax will make no adjustment to line 7, but your trades will be correctly reported.  Then, you tell TurboTax about the line 7 adjustment needed for the Qualifying trades by:

Starting the "Miscellaneous Income, 1099-A, 11099-C" interview.
Starting the "Other income not already reported on a Form W-2 or Form 1099" interview.
Answering "Yes" on the "Other Wages Received" page.
Entering $0 on the "Wages Earned as a Household Employee" page.
Entering $0 on the "Sick or Disability Pay" page.
Answering "Yes" on the "Any Other Earned Income" page.
Ticking "Other on the "Enter Source of Other Earned Income" page.
Entering a description and an amount on the "Any Other Earned Income" page.


3) Finally, another workaround is to enter the Disqualifying trades trades using the correct name of the employer and answering "Yes" to the "on the W-2?" question, then enter the Qualifying trades using a slightly different version of your employer's name and then answering "No" to the "on the W-2?" question.  That will get the Qualifying trades' compensation reported on line 7 of Form 1040. 

Tom Young

[kjblack24]

If using the Mac version of TurboTax, can I make the change in the "form" section rather than go through the machinations listed above?

[TomYoung]

I would guess you could though typically you can't e-file if you do so.

[Gunner33]

I have a somewhat similar issue. I had 3 lots ( acquired over 1.5 yrs) of ESPP that I sold (disqualified disposition). Now, the compensation income for the first 2 lots was added to my w2 box 1 and it was also mentioned in W2  section 12 a-d  under code 'V'.   Now, when I get to the last screen for ESPP on turbo tax, it asks if I see the '$xxx` on my W2 box 1 as income.  The problem is, I can't answer YES as  my W2 has total amount for lot# 1 and lot#2 but NOT lot#3.  My company had got acquired during the last offering (lot3).  How are my options as if I answer 'NO' , then I get taxed double on portion of the income.   Waiting for any helpful suggestion ?

 

[TomYoung]

"I have a somewhat similar issue."

Really, you have the EXACT SAME ISSUE, with a twist.  You've calculated compensation for 3 lots of ESPP shares but your W-2 is reporting compensation for only 2 lots.  The "twist" is that according to your W-2 you DON'T HAVE a QUALIFIED ESPP and the shares AREN'T "ESPP" shares.  Why do I say that?  Because the description for that code "V" next to amount in Box 12 is "Income from exercise of NONSTATUTORY stock option(s)".  Income created by the sale of stock acquired via a qualified ESPP just shouldn't be reported in Box 12 with a code of "V".

It's tax day tomorrow so I think you'll have to let that "code V" issue slide for the moment, and I'd guess it's a mistake on the part of the payroll department that prepared the W-2.  

If I had to make a guess I'd guess that the one lot not mentioned is considered a qualified sale, at least by the payroll department, and I'd simply handle it "as such" and use one of the work around methods mentioned in the answer.

[Gunner33]

Hi Tom,

Thanks for the insightful and in-depth information. Below is what I have ended up doing for now but haven't submitted the return yet. I'll wait for your response before I submit.

1) Used the workaround method and entered lot#3 (one with non-reported compensation on w-2) with a slight modification in employer's name to separate it from lot 1 and lot 2. Answered 'No' on last screen for ESPP for lot#3  where it asks if I see the '$xxx` on my W-2 box 1 as income.  Once I answered 'NO', the refund numbers in turbo tax DECREASED (as I expected). So, I'm assuming, I'm good here for Lot#3 as I'm paying the due taxes on this lot with this employer name modification workaround.

2) Another thing I encountered was that the total compensation reported on w-2 Box 1 (and also Box 12 a-d with code 'V')  didn't EXACTLY match  with the w-2 compensation turbo tax software expected for lot# 1and lot#2 combined. There's was a difference of $2.41 reported less on the w-2 form. I did some digging and tracked it down to lot#2 .  Anyway, I answered 'YES' on last screen for ESPP for combined lot#1 and lot#3 (same employer name) where it asks if I see the '$xxx` on my W-2 box 1 as income.  Once I answered 'YES', the refund numbers in turbo tax remained same (as I expected).

After completing the above ESPP lots, I entered the difference $2.41 under "Miscellaneous Income, 1099-A, 11099-C" interview section  following the workaround you mentioned in your original response.
I added it with a description and an amount on the "Any Other Earned Income". It DID NOT affect the refund numbers.
 
3) Looking again at the consolidated 1099-B / Form 8949, I noticed that Lot 1 and Lot 2 had some additional sale information. It mentioned that "Tax lot closed is a specified lot".  This was NOT mentioned against Lot#3.  Not sure if that matters but thought of mentioning it.

4) I  had reached out to Payroll for clarification about reporting compensation from Lot 1 and Lot 2 on my paychecks and also on w-2 Box 1 but NOT reporting anything for Lot 3.  Here's the reply I got from them:-

"...you will see a nominal amount classified as “ESPP Sale” on your pay statement and W2. This is a result of the stock price dropping between the enrollment date and the sale date.  When this happened, the company let you purchase at a 10% discount of the sales date price.    Therefore, the company provided you with a taxable benefit of a 10% discount.  This is the amount that is represented on your W2.  Your W2 is correct and you may proceed with your filings..."

fwiw, in the Lot 3 scenario, the price of the stock INCREASED between enrollment  date and the sale date

I apologize for this detailed and length question but felt I should be as clear as possible in explaining my situation to get an accurate response.

[TomYoung]

"So, I'm assuming, I'm good here for Lot#3 as I'm paying the due taxes on this lot with this employer name modification workaround."

ASSUME nothing.  Print out your entire income tax return and go over it page by page before filing.

"I noticed that Lot 1 and Lot 2 had some additional sale information. It mentioned that "Tax lot closed is a specified lot".  This was NOT mentioned against Lot#3"

I don't think it means anything important.  That seems to be saying that when you made a sale or sales that where lots 1 and 2 were sold you instructed the broker "sell these particular lots".  Maybe because they were "same day sales"?  And when you did the sale of lot 3 you said "sell 15 shares" without "specifying" and so the default FIFO process at the broker picked up lot 3?  Just guessing.

"had reached out to Payroll for clarification about reporting compensation from Lot 1 and Lot 2 on my paychecks and also on w-2 Box 1 but NOT reporting anything for Lot 3.  Here's the reply I got from them:-"

I don't really understand the response.  It almost sounds like they added the 10% discount to your ACTUAL cash paycheck?  Maybe that's why there's an amount in Box 12 with Code "V"?  There actions effectively changed a statutory option (ESPP) into a nonstatutory option (NQSO)?  Just another guess.  Ask them about the Box 12 Code V amount.

[Gunner33]

Thanks for your reply.

[dhruvin100]

I am using the 2019 Turbo Tax Premier Desktop software. I had disqualifying and qualifying dispositions for my ESPP stock that I sold. My employer included the disqualifying disposition transactions on my W2. The qualifying disposition transactions were not reported on W2 but I think they are reported to IRS through my brokerage.

I have tried @TomYoung's 3 options, and it mostly worked. Thanks!

However, it seems in the 2019 software when I get to "Your Employee Stock Plan Results" I can see the amount I expect for qualifying disposition transactions and can choose appropriately, but instead of adding it to line 7 it adds it to line 1. I have tried the 3 options but I get the same result.

If anyone knows an alternative to report this correctly, please let me know thanks. 

Or if Turbo Tax can fix this in their software it would be appreciated. I heard the online version works correctly.

P.S:

Do you guys think the IRS will deny my filing for me to fix it if my W2 income is incorrect? 

[TomYoung]

"The qualifying disposition transactions were not reported on W2 but I think they are reported to IRS through my brokerage."

No, only basic sale information is reported by the broker.

Line 1 of the current Form 1040 is the same as Line 7 of the old Form 1040.  The Form changed in 2018.

[dhruvin100]

Thanks @TomYoung that helps