Here’s a quick take on things to be aware of when your tax return involves nonqualified deferred compensation. (These items are separate from the tax-rate changes introduced by tax reform in 2018.)
Overhaul Of IRS Form 1040
The IRS condensed the Form 1040 tax return to just 23 lines and created an additional six new schedules that funnel information to Form 1040. That is where you now first enter many of the numbers you previously reported on Form 1040.
Distributions from NQDC plans, as well as salary income, are now reported on Line 1 of Form 1040 (previously Line 7). The new Schedule 1 is where you put any deferred compensation payouts not reported on Form W-2. That total is entered on Line 21 (“Other income”) of Schedule 1 (not on Form 1040), with a short description of the income reported.
For details on other changes in Form 1040 reporting, such as for stock sales and the AMT, see the related article at our sibling website myStockOptions.
W-2 Reporting Still Potentially Unclear
The IRS has still not finalized the Section 409A rules on W-2 reporting. Therefore, your company does not need to indicate deferred income on your Form W-2, though it may do so voluntarily in Box 14. (Once the IRS has finalized the 409A rules on W-2 reporting, income deferred during the year will have to be indicated with Code Y in Box 12.) Distributions from plans usually appear in the W-2 boxes used for wages and other compensation, along with Box 11 for nonqualified plans (see a related FAQ on myNQDC).
What To Do If Your Company’s NQDC Plan Violates Section 409A
If your plan violates Section 409A and you need to pay a penalty and interest:
The income that is subject to this additional tax will also appear on your Form W-2 or 1099-MISC.
Alternative Minimum Tax
Consider the alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate. Nonqualified deferred compensation itself is not an AMT preference item. However, deferrals of income can serve to prevent you from triggering the AMT in a tax year; conversely, income you receive in a distribution can trigger the AMT. While tax reform reduced the likelihood of triggering the AMT by raising the exemption and phaseout amounts, you still need to calculate it (see a related FAQ at our sibling website myStockOptions.com).
Need An Extension?
If you need to file an extension of your tax-return deadline because of nonqualified deferred compensation, see the FAQ on mistakes to avoid with extensions. Did you also have income from equity compensation or sell shares acquired from equity compensation? See myStockOptions.com for related changes in tax-return reporting.
Contact Us For Individual Premium Memberships
To start or renew your Premium Membership at myNQDC, please contact us (617-734-1979, firstname.lastname@example.org). Our online payment system is undergoing technical modifications. We can process your membership directly by telephone or email you an invoice.
Licensing And Bulk Premium Memberships
Want to license readable, high-quality content on NQDC to distribute to plan participants, clients, and prospects? Find out about our corporate services in the About Us and Licensing sections of myNQDC. Please contact us (617-734-1979, email@example.com) to obtain more information about licensing content for your website, print materials, and/or newsletters, and for premium memberships at special bulk rates for your staff.