How to Report an 83(b) Election on Your Tax Return

Understanding how to report an 83(b) election on your tax return is crucial for taxpayers who receive restricted stock or other property subject to vesting. This election allows individuals to pay taxes earlier, potentially benefiting from lower tax rates and avoiding higher taxes when the property appreciates.

Filing Requirements

An 83(b) election must be filed with the IRS within 30 days of the property transfer. Missing this deadline forfeits potential tax benefits. The election should be sent to the IRS Service Center where the taxpayer files their annual return, preferably via certified mail for confirmation. The statement must include the taxpayer’s name, address, Social Security number, a description of the property, the transfer date, the property’s fair market value (FMV) at transfer, the amount paid for the property, and a declaration that the election is made under Section 83(b) of the Internal Revenue Code. A copy should also be provided to the employer or granting entity. Taxpayers should keep a copy of the election and attach it to their federal income tax return for the year of transfer.

Forms to Include

Reporting an 83(b) election requires more than filing the election statement. Form 1040, the standard individual income tax return form, must reflect the election’s impact on income. Taxable income from the election is reported under wages or other income, depending on the property received. If the property is stock, Schedule D is used for reporting future capital gains or losses. Although the election does not create an immediate capital gain or loss, accurate reporting of future transactions is essential. Attaching a copy of the original 83(b) election statement to your tax return, while optional, can clarify the election’s timing and impact.

Calculating the Taxable Amount

The taxable amount for an 83(b) election is based on the FMV of the property at the time of transfer. For instance, if stock with an FMV of $10,000 is received and $2,000 is paid for it, the taxable amount is $8,000, reported as ordinary income. Accuracy is critical, as discrepancies can result in penalties. FMV assessments often require third-party appraisals, particularly for non-publicly traded stock. When the property lacks a clear market value, comparable transactions or expert appraisals may be needed. Taxpayers should document their valuation approach to defend their calculations in case of an audit.

Adjusting Stock Basis

Adjusting the stock basis post-election is essential for calculating future capital gains or losses. The stock basis is set at the FMV at the time of transfer, not vesting. This adjustment impacts future tax liabilities, as any increase in stock value after the election is taxed as capital gains, which often have lower rates than ordinary income. The maximum federal long-term capital gains rate is 20%, compared to ordinary income rates that can reach 37%. Proper documentation of the basis adjustment, including the initial FMV and subsequent sales, ensures accurate tax reporting and compliance.

Amended Returns if Needed

Amended returns may be required if there are errors in the initial election, inaccuracies in the reported FMV, or changes in tax regulations. To amend, taxpayers must file Form 1040-X, the Amended U.S. Individual Income Tax Return, and include a revised 83(b) election statement if applicable. The IRS generally allows amendments within three years from the original filing date or two years from the tax payment date, whichever is later. Addressing discrepancies promptly can minimize penalties or interest. Consulting a tax professional can help navigate the complexities of amending a return and ensure compliance with IRS regulations.