12 Common Tax Mistakes You Can Easily Avoid

Let's dive into 12 common pitfalls and how you can sidestep them to ensure a smooth tax filing experience.

Mistake No. 1: Double-Counting Stock Option or ESPP Income on Your W-2

This is a classic trap! When you exercise Nonqualified Stock Options (NQSOs), or when shares from a Non-Qualified ESPP are purchased, the difference between the exercise price (or purchase price) and the fair market value (FMV) of those shares is considered ordinary income. This amount is included in Box 1 of your Form W-2, along with your regular wages, and is also reflected in boxes for state and local income, Social Security (up to the yearly maximum), and Medicare. For NQSOs, you'll often see this income specifically called out in Box 12 with Code V.

Similarly, for Incentive Stock Options (ISOs) where you make a "disqualifying disposition" (selling the shares before meeting specific holding periods), the income will also appear on your W-2, though without withholding. Some companies might even voluntarily report restricted stock/RSU vesting income or tax-qualified ESPP purchase income in Box 14 of your W-2, though this isn't mandatory.

The Mistake: Many people see these amounts in Box 12 or Box 14 and mistakenly report them separately on their tax return.

The Fix: Don't! This income is already included in your total wages on Line 1 of Form 1040. Reporting it again will cause that income to be taxed twice. To verify your stock option income, compare your year-end salary paycheck stub with your W-2; the difference should reveal your option income.

Mistake No. 2: Failing to Report Stock Sales (Even "Zero Gain" Sales)

If you sold any company shares during the tax year, your broker will send you IRS Form 1099-B. This form details the sales proceeds, which you then report on IRS Form 8949 and Schedule D (Capital Gains and Losses). The total from Schedule D then flows to Line 7 of your Form 1040.

The Mistake: People often assume that if they did a "cashless exercise" or an immediate sale of ESPP shares at purchase (where all the income appeared on their W-2), there's no need to report the sale. They figure there's no additional gain, so why bother?

The Fix: You must report all sales of company stock on Form 8949 and Schedule D, even if your capital gain is zero or a small loss (due to commissions, for example). The IRS receives a copy of your 1099-B and uses advanced technology to match it against your filed tax return. If they see a 1099-B with your name on it but no corresponding sale reported, you can expect a letter from them asking for clarification, leading to delays and potential penalties.

Mistake No. 3: Miscalculating the Tax Basis (The Double-Taxation Trap)

When you sell shares, your capital gain or loss is calculated as the sales price (minus commissions) minus your cost basis. Your broker reports a cost basis in Box 1e of Form 1099-B, but here's the critical part: this reported cost basis may be too low or even blank!

Why it's tricky:

• Cost basis reporting rules are mandatory only for stock acquired in 2011 and later.

• For shares acquired from option grants made before 2014, brokers can include the compensation triggered at exercise, but it's not consistent.

• Shares acquired without direct cash payment (like those from a stock-swap exercise, SARs exercise, or restricted stock vesting) are often classified as "noncovered securities," meaning the broker may not report a basis to the IRS.

The Mistake: Using the (often incorrect) basis from your 1099-B or simply using the exercise price as your basis. This leads to double-taxation because you've already paid ordinary income tax on the compensation element (the "spread" at exercise/purchase) via your W-2. If your basis doesn't include this compensation, you'll pay capital gains tax on it again.

The Fix: Your true tax basis in the stock is the amount you paid to exercise the options (or purchase ESPP stock) plus the amount of income included on your W-2 as a result of that exercise or purchase. You must adjust the basis on Form 8949 to reflect this.

• 1099-B basis too low? Report the 1099-B basis in column (e) of Form 8949. Then, in column (g), make a positive adjustment to increase your basis to the correct amount, and put Code B in column (f).

• 1099-B basis blank/zero? Report the correct basis in column (e) of Form 8949.

• 1099-B doesn't subtract commissions? Don't add them to your basis. Instead, adjust the amount in column (g) and add Code E in column (f).

Crucial: It is your responsibility to make these adjustments on Form 8949. Don't rely solely on what your broker reports. This is where a little upfront knowledge saves you from overpaying taxes.

Mistake No. 4: Fouling Up Your AMT Calculation by Excluding ISOs

If you exercised Incentive Stock Options (ISOs) and held the shares through the calendar year of exercise, you might think, "No W-2 income, no problem!" This is a common and dangerous misconception.

The Mistake: Failing to report ISO exercises (where you held the shares) to your accountant or the IRS because you don't see it on your W-2, or because you're dreading the Alternative Minimum Tax (AMT) hit.

The Fix: While there's no regular income tax at ISO exercise, there is income for Alternative Minimum Tax (AMT) purposes. This "spread" (the difference between the exercise price and the FMV at exercise) is an AMT adjustment item. This must be reported on IRS Form 6251 to correctly calculate your AMT liability. The IRS is aware of your ISO exercise because your company reports it on Form 3921 (which you also receive) early the following year. An audit could reveal this omission, leading to back taxes, interest, and penalties.

Mistake No. 5: Neglecting to Carry Forward Your AMT Credit

The AMT you pay on ISOs is essentially a prepayment of future taxes. The good news? You get a credit for AMT in subsequent years.

The Mistake: Forgetting about previous year's AMT adjustments and failing to carry over any eligible AMT credits. This means you could be paying more regular income tax than necessary.

The Fix: Always review your past tax returns for any AMT credits. If you had AMT in a prior year, you need to calculate your credit using IRS Form 8801. This form helps you figure out how much of your AMT credit you can use in the current year to reduce your regular income tax, and how much you can carry forward to the next year. Don't leave money on the table!

Mistake No. 6: Inadvertently Overpaying AMT in the Year of an ISO Sale

Selling ISO shares after you've paid AMT on them can be incredibly complex. These shares are considered "dual basis assets" because they have a different basis for regular income tax and for AMT.

The Mistake: Not tracking both bases and miscalculating your capital gain/loss for AMT purposes, leading to an overpayment of AMT.

The Fix: You need to maintain meticulous records for both your regular income tax basis and your AMT basis for ISO shares. When you sell, you'll report the sale on Form 8949 and Schedule D for regular tax purposes. However, you also need to calculate an "AMT version" of this sale. The key to avoiding overpaying AMT is to report a negative adjustment (your "adjusted gain or loss") on Line 2k of Schedule 2 (Form 1040), Part I, Alternative Minimum Tax. This adjustment accounts for the difference between your regular income tax and AMT capital gains.

Mistake No. 7: Miscalculating Taxes with Tax-Qualified ESPPs

Tax-qualified ESPPs (Section 423 plans) allow you to buy shares at a discount without withholding at purchase. This benefit comes with specific tax rules when you eventually sell.

The Mistake: Including the discount as income in the year of purchase if you don't sell the shares in the same year, or miscalculating the ordinary income portion versus the capital gain.

The Fix:

• If you hold the shares for at least one year from the purchase date AND two years from the beginning of the offering period: In the year of sale, the "ordinary income" portion will be the lesser of the actual gain upon sale or the purchase price discount at the beginning of the offering period. Any additional gain is long-term capital gain.

• If you sell before meeting these holding periods (a "disqualifying disposition"): The compensation income in the year of sale is the full spread at purchase (the difference between the fair market value of the stock on the purchase date and your discounted price).

• Basis: Similar to options, your tax basis for ESPP shares is your purchase price plus any amount of income you recognized. Be vigilant about the cost basis reported on your 1099-B, as it might be incorrect or blank, requiring manual adjustment on Form 8949 (refer to Mistake No. 3).

Alert: For tax-qualified ESPP purchases in a given tax year, your company reports them on Form 3922 early the following year. This form helps you with accurate sales reporting.

Mistake No. 8: Failing to Track Stock Splits

If you've held company stock for a while, there's a good chance it's undergone a stock split.

The Mistake: Not accounting for stock splits when calculating your tax basis or for AMT purposes. This can lead to an incorrect basis, overstating gains, or miscalculating your AMT preference.

The Fix: A stock split doesn't change your total investment value, but it does change your per-share basis. If you had a $100 per-share basis and a 2-for-1 split occurs, you now have twice as many shares, each with a $50 basis. Ensure your tax professional is aware of all stock splits that occurred while you held the shares, as they directly impact your basis calculation for both regular tax and AMT.

Mistake No. 9: Not Writing Off Worthless Securities

If you owned company stock in a business that went belly-up, you might be able to claim a loss.

The Mistake: Forgetting to write off completely worthless company stock, thereby missing out on a legitimate capital loss.

The Fix: If a company effectively ceases operations and your stock has no reasonable expectation of being sold, you can claim a capital loss equal to the amount you paid for the shares. You report this on Form 8949 and Schedule D. The "sale date" for a worthless security is the last day of the relevant tax year. You have a generous seven years (instead of the usual three) to amend your tax return to claim a worthless securities loss. Note that you generally cannot write off income previously reported on your W-2 when acquiring the stock; the loss applies to your investment basis.

Mistake No. 10: Failing to Take Advantage of Special Tax-Code Sections (for Founders/Startups)

For founders and employees with stock in qualifying small businesses, two specific IRC sections offer significant tax breaks.

The Mistake: Overlooking Section 1202 (Qualified Small Business Stock - QSBS) and Section 1045 (Rollover of QSBS Gain).

The Fix: If your company qualifies as a Qualified Small Business Corporation under Section 1202, you might be able to exclude a substantial portion (up to $10 million or 10 times your adjusted basis) of the gain on the sale of your stock, provided you held it for more than five years. For QSBS acquired after September 27, 2010, 100% of the gains may be excluded from capital gains tax (0% rate) and omitted from the AMT calculation! Alternatively, Section 1045 allows for a tax-free rollover of QSBS gain into another QSBS within 60 days of sale. If you're a founder or early employee at a startup, investigate if your company stock qualifies.

Mistake No. 11: Botching the Math and Forgetting About Capital-Loss Carry-Forwards

Even after avoiding all the complex stock-specific errors, simple arithmetic mistakes can still trip you up.

The Mistake: Purely mathematical blunders, especially with capital gains and losses, or forgetting to utilize prior year's capital loss carry-forwards.

The Fix:

• Double-check your arithmetic, particularly when netting capital gains and losses on Schedule D.

• Ensure you are computing percentages correctly and looking at the right line on tax tables.

• Always remember to use any capital-loss carry-forwards from previous years. These first reduce your current year's capital gains, and then can reduce up to $3,000 of ordinary income each year. Any remaining loss can be carried forward indefinitely. IRS Form 8801 is where you'll track your capital loss carryforwards.

Mistake No. 12: Mechanical Errors

Finally, even simple careless mistakes can lead to processing delays or IRS penalties.

The Mistake: Typos, incorrect Social Security numbers, unsigned forms, or missing schedules.

The Fix: Whether you prepare your return manually or use tax software, always, always double-check everything. If a tax professional prepares your return, don't hesitate to ask questions about anything you don't understand. Using tax software can significantly reduce many of these mechanical errors, and having an expert review your final return provides an extra layer of security.

Navigating the complexities of company stock and taxes requires diligence, but it's entirely manageable. By being aware of these common pitfalls and proactively addressing them, you can ensure accuracy, avoid unnecessary taxes, and keep more of your hard-earned money. Tax season doesn't have to be a nightmare – with a little knowledge, you can approach it with confidence.