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5 Tax Return Mistakes to Avoid in 2012 – Part 1

5 Tax Return Mistakes to Avoid in 2012 – Part 1

photo credit: x_JamesMorris

The 2012 tax season has the potential to be more confusing than most, especially if you sold any stock last year. Even if you hire a tax specialist to handle your tax return, you can benefit from knowing some of the basic income tax reporting mistakes to avoid. In this blog post, we’ll outline three common tax return mistakes you should stay away from.

 Mistake No. 1: Double-Counting Option Income

Don’t make the painfully expensive mistake of double counting income! In order to avoid the expensive mistake of double counting income, double-check how much compensation came from salary versus options. Compare your year-end pay stub with your W-2; the difference between the two statements should reveal your option income.

Mistake No. 2: Failing To Report Sales

If you exercised NQSOs last year, the withheld taxes will appear on your Form W-2. These taxes will appear along with the spread at exercise, which will be treated as ordinary income. Be sure you do this reporting even for a cashless exercise in which you appear to have no additional gains on the sale and all the income is already on your W-2. In some cases with a cashless exercise, there will still be a small short-term gain or loss, depending on the commission.

Mistake No. 3: Miscalculating The Tax Basis

When you sell your shares, the sales price minus your cost basis equals your capital gain or loss. The revised 1099-B now reports your tax basis in Box 3. However, the cost-basis information in Box 3 of the new 1099-B may be too low, or the box may be blank. This is because the new rules for cost-basis reporting are mandatory only for stock acquired in 2011 and later, and brokers will not be required to include the compensation part of the basis until 2013. In addition, shares not acquired for cash, such as shares from a stock-swap exercise, SARs exercise, or restricted stock vesting, are considered non-covered securities.

Navigating your tax return can be confusing. In the next partof this blog series we’ll discuss two more commonly made tax return mistakes and how you can avoid them. If you’re worried about making these mistakes, we can help. Contact us today.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today!

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