Like tastes in colorful holiday sweaters, year-end financial and tax planning is very specific to the individual. Decisions in your year-end planning for stock compensation and company shares depend on many personal factors:
- your financial situation, including the short-term need to sell stock and/or exercise stock options
- whether your decisions should be entirely tax-driven
- what you did earlier in the year
- your outlook for your company's stock price
- multi-year projections for your income
Unless you were already definitely planning to sell company stock or exercise options soon, most experts feel that unease about higher tax rates in your future should not be the only reason for doing so at the end of the year. However, if you are considering option exercises or stock sales at year-end, you should be aware of the thresholds for higher tax rates and may want to consider keeping your income below them, if possible.
| Tax rate | Yearly income threshold |
| Top ordinary income rate (39.6%) | Taxable income of $400,000 (single) or $450,000 (joint) |
| Top rate on capital gains and qualified dividends (20%) | Taxable income of $400,000 (single) or $450,000 (joint) |
| Medicare surtax on investment income (3.8%) | Modified adjusted gross income of $200,000 (single) or $250,000 (joint) |
| Additional Medicare tax on earned income (0.9%) | Earned income of $200,000 (single) or $250,000 (joint) |
| Phaseout of itemized deductions and personal exemptions | Adjusted gross income of $250,000 (single) or $300,000 (joint) |
Below we present several situations and some strategies that many experts suggest. Of course, you should consult a financial advisor about your individual situation. See also two other FAQs at myStockOptions.com for additional ideas on exercising stock options and on selling company stock at the end of 2013.
1. You are planning to sell the stock at exercise late this year or early next year. You should calculate whether the ordinary income at exercise will push you into a higher tax bracket and/or trigger the Medicare surtax on your investment gains, and what the taxes will be if the rate for that bracket goes up. To break up the tax hit, you may want to spread the same-day exercise/sale over the end of this year and the beginning of next year.
Alert: When you do sell company stock, reporting it on your tax return raises other issues. See the special section Reporting Company Stock Sales, with annotated examples, in the Tax Center at myStockOptions.com.
2. You're over or near the yearly maximum for Social Security. If your income at year-end already exceeds the Social Security wage base for the year ($113,700 in 2013 and $117,000 in 2014), by exercising nonqualified stock options or stock appreciation rights in December you can avoid Social Security tax and keep that 6.2% of the income. If you wait until January, your yearly wage base starts at $0, and the Social Security tax will again apply on the exercise spread and the vesting value of restricted stock up to the new maximum for that year.
3. Additional Medicare tax. In 2013, the Medicare tax rate rose to 2.35% for single filers with yearly compensation income of more than $200,000 (more than $250,000 for married joint filers). Also starting in 2013, a new 3.8% Medicare surtax now applies to investment income, such as dividends and stock sale gains, for people in that income range.
Alert: Unlike the tax provisions outlined in the table above, the income thresholds for triggering the Medicare surtax and the Additional Medicare Tax are not indexed for inflation. The amounts set for 2013 will remain for future years unless Congress changes them.
If your multi-year projections of income show that you will trigger this surtax next year, and if you have company stock or other investments that you intend to sell soon, you may want to avoid the additional 3.8% tax by selling in 2013 rather than in 2014. Additionally, if you exercised incentive stock options during the year, are holding the ISO stock, and have plans to sell the shares after one year, you may want to evaluate the impact of higher capital gains rates, along with the new Medicare tax on investment income. This may lead you to lower taxes by selling the shares in 2013.
For seven more ideas on year-end tax and financial planning, see our flagship FAQ on these topics and all of the other year-end articles and FAQs at myStockOptions.com.
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