The alert below has a quick take on things you need to be aware of in 2023 when your tax return involves nonqualified deferred compensation (NQDC) distributed to you in 2022. It’s extracted from the comprehensive resources on nonqualified deferred comp at myNQDC.com.
Did you also have income in 2022 from equity compensation or sell shares acquired from equity comp? See the Tax Center at our sibling website myStockOptions for resources and guidance on tax returns involving equity comp and sales of company shares.
Changes In Reporting On IRS Form 1040
The IRS Form 1040 tax return has been revised for the 2023 tax season (reporting income received in 2022). Distributions from NQDC plans, as well as salary income, are now reported as part of income on Line 1a of Form 1040. (See also the article on tax-return changes at myStockOptions for more details on changes in Form 1040 reporting.)
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 from an NQDC plan 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 an FAQ on this topic at 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, you report that on Schedule 2 of your IRS Form 1040 tax return: Line 17h, “Income you received from a nonqualified deferred compensation plan that fails to meet the requirements of section 409A.”
The total on Schedule 2 is then entered on Line 23 (“Other taxes”) of Form 1040.
Depending on your employment status, the income that is subject to this additional tax will appear on Form W-2 or on the revised Form 1099-MISC and new Form 1099-NEC.
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, income deferrals or distributions can serve to prevent you from triggering the AMT in a tax year or can cause to you trigger it, depending on your other income. While the 2018 tax changes reduced the likelihood of triggering the AMT by raising the exemption amounts and phaseout thresholds, you still need to calculate it (see an FAQ on this topic myStockOptions).
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. Note that the IRS routinely postpones the filing due date for taxpayers in areas affected by natural disasters. You can find out whether you qualify for a postponement in the IRS website section Tax Relief In Disaster Situations. For most taxpayers in California, the due date for 2022 tax returns (April 18, 2023) has been extended to October 16.
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The Editorial Team