The Complete Guide to Filing Your Taxes in 2019

When tax season arrives, most of us dread the thought of having to do our taxes. It not only takes a lot of time, but is also something the taxpayers have little to no clue about as they wade through their forms and stacks of documents. Some don’t even know whether they have to file a tax return, or how they will be taxed. This guide will answer all such questions by walking you through the entire tax-filing process.

 

Table of Contents

CPA SCALE

Chapter 1: Do you need to file a tax return?

It is not mandatory for everyone to file an income tax return. Your income level and sometimes other factors determine whether you have to file an income tax return. If your income exceeds the following thresholds for 2019 then you need to file a tax return.

It is necessary to file a tax return not only if your income exceeds the above-mentioned thresholds, but also in the following cases:

  • If your self-employment income is at least $400
  • If you owe household employment taxes
  • If you owed Social Security and Medicare taxes on unreported tip income
  • If a medical savings account or a health savings account provides you with a distribution

Medical Savings Account:

Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder’s spouse, or the account holder’s dependent(s).

An Archer MSA is a tax-exempt trust or custodial account that you set up with a US financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses.

Health Savings Account:

A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA. No permission or authorization from the IRS is necessary to establish an HSA.

  • If an advance payment is given to you on the Premium Tax Credit (refundable tax credit in the United States)
  • If you hope to meet all the requirements for the earned income tax credit (EITC – refundable tax credit for low-to-moderate-income working individuals and couples, particularly those with children)
  • If you’re claiming education credits and must file to be refunded under the American Opportunity Credit
  • If you want to claim a refundable Health Coverage Tax Credit
  • If you adopt a child and want to claim the Adoption Tax Credit
  • If you had wages of $108.28 or more from a church or a qualified church-controlled organization

To check whether you need to file a tax return and to get answers to other tax-related questions, please go to https://www.irs.gov/help/ita.

Kiddie Tax

Most children do not earn money. Even if they do, it might not be more than a few thousand dollars per year. If a child is under the age of 19 and has unearned income in excess of a certain threshold, a tax return needs to be filed. The thresholds listed below determine whether a child with investment income is required to file a tax return and the rate at which s/he will be taxed.

First $1,050 No tax due (unearned income exemption)
Above $1,050 Income taxed at the child’s rate
Over $2,100 Income taxed at parent’s tax rate

Chapter 2: 2019/2020 tax deadlines

General Tax Calendar

The first quarter of a calendar year is made up of January, February, and March.

  • Jan 10 – Employees who work for tips
    If you received $20 or more in tips during December, you need to report them to your employer using Form 4070.
  • Jan 15 – Individuals’ final installment date for 2018 estimated tax payments
    If you did not pay your income tax for the year 2018 through withholding, you can use Form 1040-ES to make payment of your estimated tax for 2018.
  • Jan 15 – Farmers and fishermen
    If you did not pay your estimated tax by January 15, you must file your 2018 return and pay any tax due by March 1, 2019, to avoid an estimated tax penalty. You can pay your estimated tax for 2018 using Form 1040-ES.
  • Jan 31 – Individuals who must make estimated tax payments
    You may choose to file your income tax return (Form 1040) for 2018 by January 31 if you did not pay your last installment of estimated tax by January 15. You can prevent any penalty for late payment of the last installment if you file your return and pay any taxes due by January 31.
  • Feb 11 – Employees who work for tips
    If you received $20 or more in tips during January, you need to report them to your employer using Form 4070.
  • Feb 15 – Individuals
    To continue exemption for another year, individuals must file a new Form W-4 by February 15.
  • March 1 – Farmers and fishermen
    You must file your 2018 income tax return using Form 1040 and pay any tax due. However, you have until April 15 to file your return if you paid your 2018-estimated tax by January 15, 2019.
  • March 11 – Employees who work for tips
    If you received $20 or more in tips during February, you need to report them to your employer using Form 4070.

The second quarter of a calendar year is made up of April, May, and June.

  • April 1 – Electronic filing of Forms 1097, 1098, 1099, 3921, 3922, and W-2G
    You need to file Forms 1097, 1098, 1099 3921, 3922, and W-2G with the IRS, and this due date applies only if you file electronically.
  • April 10 – Employees who work for tips
    If you received $20 or more in tips during March, you need to report them to your employer using Form 4070
  • April 15 – Individuals, household employers

    • Individuals
      You should file a Form 1040 and pay any tax due. You may file by April 17 if you live in Marine or Massachusetts. You need to file a Form 4868 if you want an automatic 6-month extension to file the return.
    • Household employers
      You must file Schedule H (Form 1040) and Household Employment Taxes if you paid cash wages of $2,100 or more in 2018 to a household employee.
  • May 10 – Employees who work for tips
    If you received $20 or more in tips during April, you need to report them to your employer using Form 4070.
  • June 10 – Employees who work for tips
    If you received $20 or more in tips during May, you need to report them to your employer using Form 4070.
  • June 17 – Individuals
    You need to file Form 1040 and pay taxes, interest, and penalties due if you are a US citizen or resident alien living and working outside the United States and Puerto Rico.

In case you want additional time to file the return, you need to file Form 4868 and pay what you estimate you owe in tax to avoid penalties and interest.

The third quarter of a calendar year is made up of July, August, and September.

  • July 10 – Employees who work for tips
    If you received $20 or more in tips during June, you need to report them to your employer using Form 4070.
  • August 12 – Employees who work for tips
    If you received $20 or more in tips during July, you need to report them to your employer using Form 4070.
  • September 10 – Employees who work for tips
    If you received $20 or more in tips during August, you need to report them to your employer using Form 4070.
  • September 16 – Individuals
    If you are not paying your income tax for the year through withholding, you need to pay your 2019-estimated tax using Form 1040-ES.

The fourth quarter of a calendar year is made up of October, November, and December.

  • October 10 – Employees who work for tips
    If you received $20 or more in tips during September, you need to report them to your employer using Form 4070.
  • October 15 – Individuals
    You should file Form 1040 and pay any tax, interest, and penalties due if you have an automatic 6-month extension to file your income tax return for 2018.
  • November 12 – Employees who work for tips
    If you received $20 or more in tips during October, you need to report them to your employer using Form 4070.
  • December 10 – Employees who work for tips
    If you received $20 or more in tips during November, you need to report them to your employer using Form 4070.

 

Chapter 3: When do you need a tax professional to file your taxes?

It is a very difficult question to answer because it depends on how complicated your situation is. So your situation determines whether you need to hire a CPA to file your taxes.

  • Employment status
    If you are self-employed or have your own business, then it would be better to hire a CPA who can help you file taxes without any errors.
  • Recent life-changing events
    If you experienced major life-changing events such as marriage, divorce or birth of a child during the year, then you need to file taxes with a CPA.
  • Big scale investment
    Buying a new home or new car is a big scale investment, which obviously requires a CPA to help you file your tax return and determine how to adjust your withholding.
  • Starting a new business
    If you started a new small business or plan to start one, it may have many tax write-offs. A CPA can play an important role by addressing your accounting needs and resolving various problems at the time of tax filing.
  • Foreign investment
    There are many rules and regulations regarding taxation of foreign investment. If you do not have proper knowledge of these rules and regulations, you need to consult a CPA for proper guidance.
  • Do you want to risk making a mistake?
    The average taxpayer does not have much idea regarding taxation. If you are one of them and file taxes on your own, you are very likely to make mistakes and may have to pay penalties. So, hiring a CPA is always a safe bet at tax time.

CPA Scale

We have created a series of questions to help answer whether you need a CPA or not. Click here to get started!

Chapter 4: Things you should remember when preparing your taxes

You need to remember certain key things while preparing your taxes.

  • Itemizing your tax deductions is advantageous
    At the time of filing your federal tax return, you need to either calculate your itemized deduction or take the standard deduction.
    Itemized deductions are expenses allowed by the IRS that help to reduce a taxpayer’s taxable income. This will allow you to list your qualified expenses on your tax return. Itemized deductions include home mortgage interest, property, state and local income taxes, medical and dental expenses, charitable donation, investment interest expenses.
    Standard deduction is a fixed amount that you can subtract from your income before income tax is applied. You should itemize your deductions if the total amount of those deductions is greater than the standard deduction because it can save you thousands of dollars in taxes.
  • Dependent’s Social Security Number is required
    You will require your dependent’s Social Security Number if you have children or file as head of the household dependent. In case you are separated and guaranteeing a kid, ensure that your ex-companion is not claiming the same dependent, otherwise your return could be deferred.
  • Organize your documents and records
    Your receipts and proof of expenses must be properly documented if you do not want to miss any deductions. Therefore, before filing your tax return, you need to organize all your documents and records properly.
  • Reduce your taxable income
    You need to take above-the-line tax deductions. For example, the education cost and the educator expenses deduction may reduce your taxable income.
  • Consult your tax professional
    If you want to maximize your tax deduction and lower your tax burden, you must talk to your CPA. This is especially important if you are self-employed, run a business or have high income from investment. Your tax professional knows several tax strategies and current IRS rules that can help you maximize your tax deduction and resolve any tax complexities. If you do not have a CPA, of if you are looking for a new CPA or a second opinion, please click on the button below to schedule a consultation with our CPA!

Chapter 5: How to file your taxes?

Generally, there are three options to file taxes. You can file your tax return on your own, or by hiring a tax professional, or with the help of a free tax filing assistant. If you are not sure what you should do and if you have not already tried our CPA Scale quiz, click here to figure out your tax situation.

1. Filing taxes by yourself

  • Using software
    You can file taxes using software, which is one of the popular ways to file taxes nowadays. Due to development in digital technology, most of the works are done easily via the internet. You will not need to wait for a long time for a refund if you file online. Tax filing software also provides immediate help during tax filing if you have any questions. Example: Turbo Tax and TaxAct.
  • E-filing
    If you want to e-file your taxes, then you should follow a few steps. Whether you are new or experienced, you can easily complete filing in a very short period. How to e-file taxes:

    • Gather the relevant details
      You need to gather all the necessary details before filing your tax return. Details like income information, tax deduction receipts, and tax credits are required for e-filing.
    • Select an e-filing option
      You need to be careful about e-filing options. You can choose either a tax preparation software or the IRS Free e-File program.
    • Fill out the form
      You should fill out the form carefully and make sure to include 100% accurate information. Whether you are e-filing with the help of software or the IRS program, you need to provide all the details required for tax filing.
    • Submit your tax return
      Finally, you need to submit your tax return form online with payment to the IRS.
  • Paper filing
    Paper filing is done using paper and pen, which is a traditional approach to filing taxes. Unlike in e-filing, you will not get any help if there is any confusion. So you will need to be extra careful while filing your tax return. Some people still believe that paper filing is secure.How to file paper tax returns:

    • Gather your tax documents and paperwork
      You have to gather every supporting document for tax filing. These include your income statements, IRS form, and interest statement.
    • Choose the right filing form
      You may get confused due to the availability of various types of tax return forms. Therefore, you must first choose the right form to use to file your tax return.
    • Calculate your taxes and credits
      As you are using paper and pen to file taxes on your own, you need to calculate your taxes and credits properly. You also need to check whether you are eligible for credits and deductions, childcare and education credits. Any miscalculation may result in penalties. It is up to you to include your sources of income, investment interest, and retirement accounts.
    • Claim your dependent exemptions
      If you think you are qualified to claim exemptions for qualifying dependents, then you should claim them so that you can get the benefit.
    • Mail your paper tax return
      Send your paper tax return with tax payment to the IRS before the due date to avoid late payment penalties. You can use any of the options to pay: check, money order, direct pay, debit or credit card or electronic federal tax payment system. It takes a longer time to get a refund if you use this method to file your tax return.

2. Filing taxes with a tax professional

Federal tax returns can be prepared by any tax professional having an IRS Preparer Tax Identification Number (PTIN). Hire a CPA or a tax professional if your tax situation is complicated because they can help you file your taxes and also save thousands of dollars on taxes by leveraging the tax laws.

How to file your tax return with a tax professional:

  • Gather required information
    Generally, a tax expert knows everything but you should also have some knowledge of the current tax law so that you do not get cheated. You can either provide the required information to your tax preparer directly or complete a questionnaire. You need to gather the following documents when filing taxes with a tax professional.

    • Personal Information
      You need to provide your personal details. Your details may include your social security number, addresses, identification, and property that you sold or bought.
    • Additional Income Statements
      If you have more than one source of income, then you need to provide your additional income statements.
    • Proof of Expense
      You need to provide proof of all your expenses.
    • Dependent Exemptions
      You need the Social Security Number of your dependent if you think you are qualified to claim your dependent exemptions.
    • Charitable Contributions
      If you have donated to a charity and itemize your deductions, then you must maintain a record of any contribution of $ 250 or more.
    • Wage and Tax Statement
      You need to provide a report of W-2 Form (wages, tips, other compensation, social security, Medicare, and withheld income taxes).
    • Certain Gambling Winnings
      You also need to provide reports of certain gambling winnings such as horse racing.
    • Annual Return of Withheld Federal Income Tax
      Your federal tax withheld on Forms 1099 and W-2G should be reported on Form 945.
    • Mortgage Interest Statement
      You need to provide a statement of mortgage interest if you have received mortgage interest from anything that you have mortgaged.
    • Cancellation of Debt
      You need to report your cancellation or discharge of a debt owed to a financial institution, credit union, the federal government, etc.
    • Dividends and Distributions
      You need to provide distribution of dividends, capital gains and nontaxable that were paid on stock and liquidation.
    • Interest Income
      You also need to provide interest income.
    • Miscellaneous Income
      If you have miscellaneous income, then you need to provide information regarding such income.
  • Find a tax preparer
    First, choose a tax professional if you have not yet because it will be very difficult to find one at tax time. Now is the right time to choose a CPA that is right for you.

    • How to choose the right CPA?
      If you are not sure how to choose the right tax professional, then you can either ask your friends (since many of your colleagues may have gone to tax professionals for filing taxes) or find one on https://irs.treasury.gov/rpo/rpo.jsf. This IRS page has a list of many tax professionals with their qualifications, so you can simply choose one of them from the list. Make sure to check whether the preparer has a valid Preparer Tax Identification Number (PTIN) because only a tax professional with a PITN is authorized to prepare federal income tax returns. Generally, tax professionals charge high fees for tax filing, so inquire about the fees beforehand.
  • Schedule an Appointment
    Meet your tax preparer as soon as possible so that you can start the tax filing procedure much before the due date and also get your refund soon.

3. Free tax filing assistant

The IRS runs a voluntary program to provide free tax preparation services for low-income individuals, students, elderly, disabled, and non-English speakers. The income limit is $54,000. Volunteers can file tax returns only after they successfully complete a Franchise Tax Board (FTB) and Internal Revenue Service (IRS) training program. They are called certified volunteers. Sometimes California state university campuses offer free tax preparation services with the help of student volunteers. If you live near such campuses, you can get your tax return filed by the volunteers.

For more on free tax preparation, please go to https://irs.treasury.gov/freetaxprep. 

Chapter 6: Are you a first-time tax filer?

If you have never filed a tax return before, then you may feel difficulty in understanding tax-related terms such as W-2 form, standard deduction, itemized deduction, tax credits, and exemptions. So you need to follow these steps before filing a tax return.

  • Discuss your taxes with your parents
    If your parents have claimed you as a dependent on their tax return, then you will not be allowed to take the standard deduction. So talk to your parents about it before filing your tax return.
  • Start the tax filing process as soon as possible
    The sooner you start your tax filing process, the sooner you can receive your refund check. You also get ample time to figure out the taxes if you file early. The advantage of starting tax filing early is that you can gather all the necessary documents, talk to a tax professional and get answers to any tax-related questions you might have.
  • Gather the required information
    You need to gather personal information, proof of expenses, income statements, dependents, etc, which are necessary for your filing a tax filing.
  • File the right tax form
    Since you are filing a tax return for the first time, you may be confused about choosing the right form; it is not always necessary for a new taxpayer to a file a Form 1040EZ. Depending on your situation, you may need to file some other form. Therefore, you can either discuss with your tax professional regarding the right tax form for you or refer to the IRS website.
  • Double-check everything
    Even minor mistakes could cause problems in the future such as the IRS withholding your refund. Therefore, every required document should be properly reviewed before filing your return even if you have hired a tax professional.

Chapter 7: Changes in the tax code that will affect you in 2019

The Tax Cuts and Jobs Act made several changes to the tax law, but such changes do not take place every year. So you do not need to panic yet. The IRS said, “The inflation-adjusted rates also don’t take effect until Jan 1, which means taxpayers will not use these figures for their 2018 tax returns filed in 2019. The changes will generally affect returns filed in 2020.” The IRS also announced that it is using a new method for making adjustments for inflation, which will follow a slower-moving measure of inflation and could affect how much Americans owe in taxes in the long-term. The change could cost taxpayers $133.5 billion over a decade, according to the Congress’s Joint Committee on Taxation. The Marginal Income Tax Rates and Brackets of the year 2017 and 2018 are shown in the table below.

2017 Marginal income tax rates and brackets

2018 Marginal income tax rates and brackets

 

Standard Deduction

For the year 2017, the standard deduction amounts are as follows:

For the tax year 2018, the standard deduction amounts are as follows:

Child Tax Credit

In 2017, parents received $1,000 in child tax credit for qualified children under the age of 17 if they had made less than $110,000 jointly or $75,000 individually. In 2018, tax credit for qualified children has been increased to $2,000 and income limits for the credit to $400,000 jointly or $200,000 individually.

Charitable Donations

Another frequently used deduction is charitable donation. Giving bigger donations may be good for you as you can deduct up to half of your income through qualified charitable donation.

Medical and Dental Expenses

You can deduct only the amount of qualified medical expenses that exceeds 7.5% of your adjusted gross income for 2017 and 2018. Beginning Jan 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that is more than 10% of their AGI.

SALT Deduction

SALT stands for state and local taxes. It allows you to deduct from your state income taxes only if you choose itemized deduction. Previously, there was no limitation on the deduction of state and local taxes. People living in California and New York were taking advantage of this, so the new tax reform keeps SALT deduction but limits the total deductible amount to $10,000.

Chapter 8: How to avoid estimated tax penalties

Do you need to pay estimated taxes?

You need to pay estimated taxes on certain income such as prizes, rent, self-employment, interest, and dividend that are not subject to withholding.

 

Underpaying estimated taxes leads to penalties

Your particular circumstances will determine the number of penalties and it may differ from year to year. The Internal Revenue Service (IRS) will send a bill for the penalty amount and the penalty that you owe for the underpayment of estimated taxes. In some situation, you may need to calculate the penalty yourself. Underpayment of estimated taxes leads to penalties that are figured separately for each payment period of estimated taxes. You need to use IRS Form 2210 to figure your penalty amount. This contains both a short and regular method for determining your penalty. It would be better to determine the amount of tax that you have underpaid. Then Form 2210 can guide you through the process of figuring your penalty amount. It is directly based on the amount of your tax underpayment. You should make at least a minimum payment for a certain payment period so that you will not owe a penalty.

 

Penalties for underpaying estimated taxes are charged

If you do not pay enough taxes at the time of your tax payment, you may have to pay a penalty. It may be either through automatic withholding or through the payment of estimated taxes, or a combination of both. Even if you are entitled to a tax refund and if you do not pay enough taxes by the due date of each estimated tax payment, you may have to pay a penalty. There are some exceptions, though. For example, you will not have to pay a penalty for underpaying estimated taxes if

  • Your total tax is less than $1,000
  • You had no tax liability in the previous year

 

IRS may waive your penalty for underpaying estimated taxes

If you fail to pay enough estimated taxes due to some unavoidable circumstances like any kind of casualty, disaster, or other unusual situations, the IRS may waive your penalty for underpaying estimated taxes. You will need to file IRS Form 2210 in order to request a waiver along with Form 2210. You will need to write a statement of explanation, evidence of your age and retirement date, documentation regarding your disability, proof of a casualty, disaster, or other unusual situation. You may also get your penalty waived if you meet the following requirements:

  • Retired after the age of 62 years
  • Became disabled
  • Valid reasons for not making the payment

 

Tips that can help you avoid underpaying your estimated taxes

The IRS will impose a penalty if you underpay your estimated taxes. To avoid such penalties, you should:

  • Ensure that your estimated tax payments, tax withholding, and refundable credits equal at least 100% of the total tax that you paid in the previous tax year if your income is less than $150,000
  • Ensure that your estimated tax payments, tax withholding, and refundable credits equal at least 110% of the total tax that you paid in the previous tax year if your income is more than $150,000
  • Pay at least 90% of the tax that you will owe on your estimated income if you can effectively evaluate your income for the present tax year
  • Use IRS Form 1040-ES to accurately figure your estimated tax

BONUS CHAPTERS

Foreign Bank Account Report (FBAR)

FBAR stands for “Foreign Bank Account Report” and refers to FinCEN Form 114, Report of Foreign Bank and Financial Accounts.

Who must file an FBAR?

If you are a citizen, resident, green card holder or resident alien of the United States and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported, then you need to file FBAR. The objective of FBAR filing is to show the existence of the taxpayer’s relationship with the foreign account. Your reportable accounts may include savings, checking, securities, brokerage, and mutual funds.

If you want to deceive intentionally or non-intentionally and do not file FBAR, in both cases you have to pay penalties. If you failed to file not willfully, you need to pay penalties, which can be $10,000 and if done willfully, you may need to pay $100,000 or 50% of the total amount. Many of us are in confusion whether to file FBAR with a federal tax return or with FinCen. But you do not need to have any confusion since FBAR is filed directly with FinCen.

Due date for FBAR                          

The new due date for FBARs is April 15. Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Public Law 114-41 mandates this date and a maximum six-month extension for filing deadline was mandated by the Act.

How do I file FBAR?

You can file your report of Foreign Bank and Financial Accounts electronically using BSA E-Filing System or you can visit a tax professional registered with the BSA E-Filing System.

You can follow the listed links in order to file FBAR

https://bsaefiling.fincen.treas.gov/main.html

https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html

Restricted Stock Unit (RSU)

Companies often issue RSUs to reward their employees with an investment in the company through a vesting plan in the form of organization stock. When your company gives you RSUs, it means you receive units that will be exchanged for actual stock in the future. When you take ownership of the actual share it is called vesting date. At the point when the RSU vests, it makes an “ordinary income” tax event, and a portion of the units is consequently sold at vest time to cover the tax liability, which is the difference between the market price value (FMV) of the stock at vest time and the price paid by the grantee.

Selling stock

When you sell your stock, you can be taxed in different ways. If you sold RSUs at vest time, you will not have to pay income tax and you will be in profit. However, if RSUs are not sold at vest time, you need to pay income tax. If you hold the stock for one year or more, you will owe long-term capital gains tax on the difference between the market price at vest day and the price on the day you sell it. There are no advantages to holding the RSUs after they vest.

Paying taxes

You will be responsible for paying estimated taxes if your employer does not withhold tax on your RSUs. You need to pay every quarter to the IRS – on April 15, June 15, September 15 and January 15. If you do not want cash withheld from your paycheck, you may be able to pay the tax by having your employer take it out of the shares.

Dividends

RSUs do not have voting and dividend rights until vesting takes place which is one of the differences between RSUs and restricted stocks. Some companies may accrue dividend equivalents on shares of stock. The accrued dividend equivalents are paid to RSU holders at vesting in cash or additional shares.

Beneficiary designations

Beneficiary designation and transfer of your RSUs is needed to avoid problems that may arise due to a certain unavoidable event like a death in the future. Some RSU plans may or may not allow you to designate a beneficiary.

Tax withholdings

Your employer will withhold taxes from your RSUs. Many companies withhold federal income taxes on RSUs at a flat rate of 22%. Your withholdings will not be enough if your marginal tax bracket is higher than 22% excluding RSUs. To avoid a potential penalty for underpayment of estimated tax you need to either:

  • Increase withholding amount from each paycheck by adjusting your W-4

OR

  • Make quarterly estimated tax payments.

Employee Stock Purchase Plan (ESPP)

An employee stock purchase plan (ESPP) is a company-run program by which organizational participating employees can purchase the stock at a discount through accumulated payroll deductions over a period of either 3 months or 6 months. You can make a great return every period when the stock price keeps on rising, however, when the stock price keeps falling you can still have at least a 15% return.

An employee who owns more than 5% of company stock is not allowed to participate. It is only available for employees of publically traded companies. So whenever your employer offers ESPP, you can buy according to your capacity.

Types of ESPPs

  • Qualified
    • Qualifies under Section 423 of the Internal Revenue Code (IRC)
    • Allows employees to purchase company stock at a discount
    • Allows employees to postpone recognition of tax on the discount until the shares are sold
    • Require the approval of shareholders before implementation
    • Offering period cannot be greater than 3 years
  • Non-Qualified
    • Allows participants to purchase company stock
    • Does not offer the employee-related tax advantages
    • Applicable taxes are due at purchase

ESPP gains tax

Your tax event will start whenever your share is purchased. You need to pay a tax based on the discount and sale price. You can either sell immediately or hold for a longer time. You will owe long-term capital gains if you hold the stock for more than a year. The tax treatment for ESPP is unique – if the offering period resets, the holding period for long-term capital gains is extended. There is no advantage in taking a risk by holding the stock for a longer period. If you think you are not able to sell immediately, then it is better not to purchase. Moreover, if you want to purchase, then make sure to sell the stock immediately on the same day you purchase your stock.

Cost Segregation

It is the practice of identifying assets and their costs and is especially done for a variety of reasons like income tax, financial accounting, insurance purposes and property tax. Cost segregation can be your lifeboat in a sea of property taxes. You can look forward to significant tax savings when depreciation is calculated through cost segregation.



Leave a Reply