Leading Advisors On Year-Start Planning For Stock Options, RSUs, ESPPs

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Financial and tax advisors routinely use the year-start period to get their clients to consider what’s next for their stock comp and holdings of company shares. Decision-making moments come at you fast when you have stock options, restricted stock units, an employee stock purchase plan, or other forms of company equity comp. This article presents what some leading advisors tell their clients.

Thinking Ahead: Questions To Ask

John Barringer, the managing partner of Executive Wealth Planning in Denver, explains that in his approach to clients, the early-year window is “a mirror of the end of the year—same basic questions as we had then.” One of those questions he asks his clients at year-start concerns the prospects for new equity awards. “What grants do you expect?”

John furthermore emphasizes the importance of knowing—and giving your financial advisor—a complete picture of your equity comp and company shares. “I’m surprised how many times clients will go into the brokerage website and click and sell something without telling us what they’re doing.”

He adds that you also want to be aware of stock option grants that are scheduled to expire this year, along with what would happen to stock options and RSUs should you lose your job. If you think you may take a new job at a different company, answers to key questions will help you negotiate severance or a new compensation package.

“What option grants will expire soon or could expire if you’re laid off?” John asks his clients. “What grants do you expect to receive in the first quarter or first half of the year? What RSUs vest in the coming year?”

Job Changes Ahead?

Clients’ job situations and career goals are a routine year-start focus for Rebecca Conner, the founder of SeedSafe Financial LLC, based in Austin, Texas. Any moves in the year ahead could affect income and the need to exercise options sooner than anticipated, depending on the company’s post-termination exercise deadline. “Review job expectations. If you’re making a move this year, consider your total expected income and the impact of any stock options that you may need to exercise when you leave your current job for a new one.”

Tax Planning For Withholding

“Prepare for estimated taxes for RSU under-withholding,” advises John Owens, Managing Partner at Brooklyn FI in New York. One of the tasks he likes to do with clients as part of year-start planning is to get ahead of the game and map out the estimated payment for at least the first quarter.

Why? The federal flat withholding rate at restricted stock/RSU vesting for most employees may not cover all of the taxes you owe to the IRS, depending on your tax bracket. The flat withholding rate that most companies use for employees’ supplemental wage income is 22% (it is 37% for yearly total amounts in excess of $1 million). One way to remedy a meaningful tax shortfall is to pay quarterly estimated taxes.

ESPPs

John Owens also points out that year-start is a great time to enroll in, or review your salary contributions to, an company employee stock purchase plan. He is an ESPP fan, especially if the plan has “a good lookback provision for calculating the purchase price.” An ESPP with a discounted purchase price and a lookback can be a good deal, even if the stock price declines after enrollment.

Tax Returns

Tax season is another year-start client focus for Rebecca Conner. “Early in the year, we’ll be getting ready for tax returns, so we’re looking for forms. We’re making sure we know where things are or when things are due. We’re re-checking cash to be sure we have enough for taxes as well as all of our strategies.”

Special Issues For Incentive Stock Options

Special issues arise with incentive stock options and the alternative minimum tax. You can trigger the AMT when you exercise ISOs and then hold the shares beyond the calendar year of exercise, though this is less likely under the TCJA than it used to be. Many experts say that the first quarter of the year is the best time to exercise ISOs, given the ISO tax treatment.

Here’s why. With ISOs, when you sell the shares after holding them for more than one year from exercise and two years from grant, your entire gain over the exercise price is capital gain (no ordinary income). This a called a qualifying disposition.

However, when you hold the shares beyond the calendar year of exercise, the spread at exercise becomes part of your AMT income calculation, not your regular income tax, for that year. As you pay the higher of either your AMT or your regular income tax, an ISO exercise followed by holding the shares through the calendar year of exercise can result in paying the AMT on paper gains recognized at exercise — even if the stock price has since fallen.

Therefore, one core strategy for ISOs is to exercise the options early in the year and then re-evaluate the stock price in late December. If the stock price has fallen since exercise, you can sell before year-end and eliminate the AMT on your paper profits from the exercise spread. This is sometimes called an “escape hatch” strategy.

That is why John Owens emphasizes with his clients the importance of year-start planning for ISOs. “I love an early-year ISO exercise,” he enthuses. “Early in the year, we’re talking with clients about whether to do ISO exercises and holds.”

Exercising ISOs early in the year gives you the rest of the year to see where the stock price goes, he explains. This allows plenty of time to make decisions about whether to sell the shares or whether to hold them beyond year-end. If you owe the AMT because of the ISO shares that you hold, you can sell some of the ISO shares the following year at your long-term capital gains tax rate to pay the AMT. For startup companies, with 409A stock-price valuations staying flat or declining, John also suggests this as an early-year strategy to consider, though it brings additional risks and a lack of liquidity in the shares that you acquire.

Rebecca Conner also advises ISO exercises early in the year. She particularly favors doing so when the stock price is depressed and/or when the company’s outlook is positive. “Then if something happens during the year you can always sell the stock if you need to and disqualify it.

Year-End Strategies

For planning actions to take at the end of the year, see the year-end section at myStockOptions. Many of the advisor recommendations presented in it remain relevant every year.

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Tax Planning: The Top 3 Numbers To Know For 2025

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Taxes come at you fast. Planning now, in the early part of the year, can help prevent headaches later.

In fact, January is an excellent time to consider your tax planning for 2025. It occurs before tax-return season, which puts your focus on last year’s income. It also comes before the likely bustle over tax legislation by the new Republican White House and Congress. They must decide whether to extend the current tax code, introduced in 2018 by the Tax Cuts and Jobs Act, which expires after 2025.

In this calm before those storms, take a moment to understand the federal tax-related numbers for 2025 that are crucial for you.

Where to begin? The IRS and the Social Security Administration annually adjust for inflation a myriad of key numbers in federal tax-law provisions. Amid this onslaught of tax figures, it can be difficult to spot the adjustments that matter to you.

Some apply only to very high-net-worth executives and other super-wealthy people, such as the federal estate-tax exemption (in 2025, $13.99 million for unmarried taxpayers and $27.98 million for married taxpayers). The more obscure adjustments are chiefly of interest only to administrators of corporate benefit plans and other experts (like me) who keep track of this stuff. For example, the income definition of “highly compensated employee,” which affects eligibility for employee stock purchase plans and 401(k) plan non-discrimination testing, is $160,000 in 2025.

So let’s cut through the clutter and focus on the essential points. Below are three sets of tax figures in 2025 that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings.

1. The Social Security Wage Base

The Social Security tax (at a rate of 6.2%) applies to wages up to a maximum amount per year that is set annually by the Social Security Administration. Compensation income above that threshold is not subject to the Social Security tax. (By contrast, the Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level.)

The Social Security wage cap is $176,100 in 2025, up from $168,600 in 2024. This means the maximum possible Social Security withholding in 2025 is $10,918.20. Once your income is over the wage cap and you’ve maxed out the withholding, you’ll see 6.2% more in your paycheck.

2. Your Income-Tax Bracket And Withholding

If you’re an employee, your company withholds taxes from your paycheck according to the information on your Form W-4. The IRS recommends that you consider completing a new Form W-4 whenever your financial, personal, or job situation changes.

The table below shows the federal income-tax brackets and their rates. It can help you understand how an additional amount of compensation would be taxed at your marginal tax rate: the percent of tax you pay for an additional dollar of income in your current tax bracket. That number tells you whether the withholding as indicated on your W-4 will cover the total tax you will owe for 2025. To avoid penalizing additional income in your mind, be sure you know your effective or average tax rate.

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Need To Pay Estimated Taxes?

Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate for that income. Instead, they apply the IRS flat rate of 22% for supplemental income (the flat rate is 37% for yearly supplemental income in excess of $1 million).

As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% does not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the 2025 tax return you will file in 2026, pay estimated taxes during 2025, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall. Speak with a qualified tax professional, such as a CPA or an Enrolled Agent, when you’re uncertain about the best approach to take.

If estimated taxes are the route you choose, know that due dates for quarterly estimated tax payments in the 2025 tax year are April 15, June 16, and Sept. 15 of 2025 and Jan. 15 of 2026. (The IRS routinely postpones these due dates for taxpayers in areas of the United States affected by natural disasters, such as the Jan. 2025 wildfires in Southern California. See the IRS website section Tax Relief In Disaster Situations.)

3. Your Contribution Limit For Qualified Retirement Plans

In 2025, you can elect to defer up to $23,500 from your paychecks into qualified retirement plans, such as your 401(k) (or your 403(b) if you work for a nonprofit, school, or government agency). That annual limit rose from $23,000 in 2024.

The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $70,000 in 2025, a $1,000 increase over last year’s amount. If you are at least 50 years old, you can contribute an additional $7,500 per year.

The amount of compensation income that can be considered in the calculation for qualified deferrals grew to $350,000 in 2025. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.

Want To Defer More Income?

Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan. For more on these plans, see the website myNQDC.com.

Inflation Adjustments For Health Savings Accounts

While not all employees have them, health savings accounts (HSAs) are also getting an increase in their pre-tax contribution limits for 2025 in response to inflation. HSAs are available only for high-deductible health plans.

The IRS has raised the yearly contribution limit for HSAs. For self-only coverage it is $4,300 in 2025, up by $150 from last year. For family coverage it is $8,550 in 2025, up from $8,300 in 2024. The limit for HSA catch-up contributions, available for people 55 or older, remains $1,000. With more companies setting up pre-tax payroll deductions for HSAs and matching employee contributions, these increases could be significant for many people as the cost of health care continues its relentless rise.

IRS Resources

Here are resources with more details on the many adjusted 2025 tax numbers:


Year-End 2024: Post-Election Tax And Financial Planning

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While the tax and financial-planning environment at year-end 2024 is the same as in the past few years, the outcome of the 2024 election looms large this year. The results—Donald Trump’s second presidency and a Republican majority in Congress—have added some clarity on taxes but have also introduced areas of uncertainty.

The longer-term outlook for the tax laws and the stock market is a key factor at year-end 2024 for employee stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), and related holdings of company shares.

Tax-Planning Outlook

The Republican-driven Tax Cuts & Jobs Act (TCJA) will expire after 2025 unless it is extended or made permanent. Before the election, when the White House and Congress were considered a tossup, the tax landscape after 2025 was anyone’s guess. Wildly different outcomes were possible, from tax hikes to tax cuts. The Republican sweep of the White House and Congress has removed at least some of that uncertainty.

“The extension of the Tax Cuts & Jobs Act beyond 2025 seems to be locked in,” believes John Barringer, Managing Partner of Executive Wealth Planning in Denver. He was one of three experienced financial advisors who spoke during a recent myStockOptions.com webinar on year-end planning.

While it is tempting to think that the incoming Republican White House and Congress will not just extend the TCJA but actually make it permanent, all three of the webinar’s advisor panelists expressed doubt about that extreme. Even the webinar audience of advisors seemed to agree. In a poll conducted live during the webinar, about 70% of the attendees indicated that they believe the TCJA will be extended but not made permanent.

Nevertheless, the advisors who spoke during the webinar are confident enough about an extension to reallocate their planning focus to other areas. “A lot of our planning was built around the TCJA expiring,” said webinar panelist John Owens, Managing Partner of Brooklyn FI in New York. “In light of the election, multiyear planning at year-end has shifted. We may have a broader timeframe to think about how we space out ordinary income. It means that state taxes actually matter more, now that federal tax rates will stay similar to what they are.”

Plenty of other open tax-law issues remain that could affect planning for equity compensation. Some, for example, involve the calculation of the alternative minimum tax (AMT), a big concern for anyone with incentive stock options (ISOs).

In 2018, the TCJA increased the AMT income exemption amounts and substantially raised the income point where the exemptions start to phase out. Those moves made it less likely for employees with ISOs to trigger the AMT after they exercise the options and hold the stock. The spread at exercise is part of the AMT income calculation when the shares are held beyond the calendar year of exercise.

However, policy discussions in Congress suggest that the $10,000 cap on itemized deductions for state and local tax (SALT) may be increased or eliminated. The amount of the SALT deduction is added back as part of the AMT income calculation. Moreover, to pay for a higher SALT cap, Congress might then have to reconfigure the AMT income exemptions and phaseouts themselves. These potential changes could bring the risk of the AMT back into play for more people with ISOs.

“We’re looking at a lot of ISO exercises right now for either this year or next year,” said webinar panelist Rebecca Conner, the founder of SeedSafe Financial in Austin, Texas. “If that SALT cap is eliminated, my California clients are going to have a very large add-back in their AMT calculation.”

Other potential modifications to tax rules could be engineered by the Trump White House without recourse to Congress. For example, near the end of his first White House term, President Trump sought a way to require the IRS to issue rules that would index for inflation the all-important cost basis used to calculate capital gains and losses when shares are sold. Indexing capital gains for inflation has long been a GOP goal and seems likely to be attempted again.

Stock-Market Outlook

One area of increasing uncertainty is the direction of stock prices for employees with equity compensation and holdings of company shares. Amid the promise of tariffs, deregulation, immigration restrictions, increased domestic energy production, and other factors, how will the second Trump administration affect your company’s stock price and therefore your equity comp planning?

“That probably depends on what industry you’re in,” explains John Barringer, a seasoned veteran of many market eras and economic cycles.

“If you work for a company in the energy or financial sector, the next four years will probably be good ones for you,” he noted, citing President-Elect Trump’s stated ambition to ramp up domestic energy production. However, John observed, Trump’s well-known policies targeting immigration may be bad news for some sectors. “If you work for a company that relies on immigrant labor, like hospitality, agriculture, homebuilding, meatpacking, or education, you may find it difficult to meet your performance goals.”

The ways in which the Trump tariffs play out will also be a factor, especially in technology sectors. “If you’re a tech worker at an established company that relies on Asian manufacturing, sales may be a little slower,” John warned.

Overall, however, short-term economic indicators seem to offer a salubrious outlook for company stock performance. “The market is acting like it believes growth with higher inflation will be a good thing,” John said. “The US dollar is stronger because the US is probably going to continue to outperform the rest of the world. Cyclical industries, like financials, are leading the way.”

John believes that optimism about deregulation could translate into an uptick for mergers, acquisitions, and initial public offerings (IPOs). This would be good news for employees in late-stage pre-IPO companies who have seen the postponement of the M&A or IPO liquidity events that they need to cash in on their equity awards. “If you’re working at a startup, there may be a light at the end of the tunnel for your delayed IPO,” he said.

John Owens of Brooklyn FI thinks the potential for more IPOs is strong enough to make this a good time to evaluate exercising ISOs in private companies. You would then hold the ISO shares long enough to get the best tax treatment at sale.

Year-End Equity Comp Planning Moves In 2024

The election has not changed the immediate environment for year-end financial planning in 2024, with advisors recommending many of the standard strategies that apply every year. For more on those, see a related article Advisor Insights On How Market Uncertainty Impacts Year-End Planning For Options, RSUs, And ESPPs.

One major strategy involves multiyear planning and income-shifting if you expect a spike in income (e.g. from equity compensation, a raise, or a big cash bonus) or a change in your job status. If you anticipate that you will be in a higher tax bracket in 2025, consider ways to accelerate income into 2024 or spread out exercising over two years. For example, you may want to exercise nonqualified stock options (NQSOs) or sell company stock from an RSU vesting with large capital gains.

“Do we have some ‘bracket space’ within which we could exercise some options and stay in our marginal bracket to meet our diversification goals?” is something that John Barringer asks his clients. John Owens agrees. “Consider bracket management if you’re likely to see an ordinary income tax hike, especially with NQSOs,” he said during the myStockOptions webinar.

For clients with incentive stock options, Rebecca Conner routinely conducts a review of ISO exercises made earlier in the year to assess the risk of triggering the AMT on shares held beyond the calendar year of exercise. “Evaluate whether to sell them in the calendar year and exercise other ISOs.” She weighs whether clients should “lean into” exercising other ISOs, especially if the company’s stock price has been volatile.

John Barringer takes his clients through stock option grants that may be nearing their expiration date. “Old grants or ones that will expire soon should still be evaluated for exercise. How are we doing on our other goals, especially retirement? Can an equity exercise further fund it?”

Further Resources

The webinar in which the panelists spoke is available to stream on demand. At myStockOptions, we have comprehensive education and guidance on year-end financial and tax planning for stock options, RSUs, ESPPs, and company shares in our section Year-End Planning.

Equity Comp Masterclass: Special Three-Part Webinar Series

myStockOptions Equity Comp Masterclass

At the myStockOptions Webinar Channel, our 2024 Equity Comp Masterclass series of three webinars proved to be one of our most popular offerings yet. You can now watch the full series on demand. Each webinar includes the detailed slide deck, checklists, and handouts via the webinar player.

Register for the full masterclass series of three webinars at a special package price ($395) or for any of the individual webinars, listed below:

Part 1: Stock Options ($149)
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Part 2: Restricted Stock/RSUs & ESPPs ($149)
1.0 CE credit for CFP, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors ($189)
2.0 CE credits for CFP, CPWA/CIMA, and CEP/ECA

Parts 1 and 2 cover essential topics (including taxation) and feature plentiful examples. These two 60-minute webinars are presented by Bruce Brumberg (JD), the editor-in-chief and co-founder of myStockOptions.com and a Forbes.com contributor. Bruce is a highly respected expert who explains these topics in a practical, memorable, and engaging way.

Part 3 brings together all the fundamentals and taxation. The webinar features leading financial advisors actively working with clients who have equity compensation. They provide their top tips and real-world case studies. Panelists:

  • Megan Gorman (JD), Founder, Chequers Financial Management
  • Chloé Moore (CFP®), Founder, Financial Staples
  • Danika Waddell (CFP®, RLP®, CSLP®), Founder, Xena Financial Planning
  • Daniel Zajac (CFP®, EA), Managing Partner, Zajac Group
  • Bruce Brumberg (JD), Editor-in-Chief and Co-Founder, myStockOptions (moderator)

Whether you are new to stock comp or want to sharpen your knowledge, these webinars will provide practical info and insights to maximize your success.


Nonqualified Deferred Comp: 2025 IRS Contribution Limits On Qualified Plans Affect How Much To Squirrel Away For The Future

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Now for some news from our sibling website myNQDC.com, a leading resource on nonqualified deferred compensation (NQDC). Year-end is when many participants in NQDC plans make like an autumn squirrel and choose how much of next year’s pay to put away for the future. Generally, you defer income via nonqualified plans only when you know you will max out your yearly contributions to qualified plans, such as your 401(k).

Crucially for this decision, the IRS just released the 2025 contribution limits for qualified retirement plans. If you’ve already maxed out your qualified plan contributions for 2024, you will probably do the same in 2025, so you will need your NQDC plan to defer any salary and bonus increases you expect in 2025. You may have an additional incentive to defer taxable income if you believe you will be in a higher income-tax bracket in 2025 than you are in 2024.

Further down the line, the outlook for federal tax rates themselves is unclear beyond 2025. The Tax Cuts & Jobs Act (TCJA), which established the current tax law in 2018, is scheduled to expire after 2025. It is up to Congress and the next president to decide whether the tax law will be extended, keeping the current tax brackets and rates, or replaced with new tax legislation that has a different structure.

2025 IRS Contribution Limits For Qualified Plans

The IRS inflation adjustments from 2024 to 2025 are fairly typical, unlike the prior bigger adjustments made in response to higher inflation. Below are the key annual contribution limits for qualified retirement plans in 2025.

Contribution type/limit 2024 2025
Compensation limit in qualified deferral and match calculation $345,000 $350,000
Elective compensation deferrals, such as 401(k) and 403(b) $23,000 $23,500
Catchup contribution for people aged 50 or older $7,500 $7,500
Total defined contribution limit (employee and employer contributions) $69,000 + catchup contribution $70,000 + catchup contribution
Defined benefit plan payout limit $275,000 $280,000
Income threshold defining key employees for top-heavy plans and six-month delay on payout upon separation $220,000 $230,000
Income threshold defining highly compensated employees for nondiscrimination testing; this also applies to income point where companies can exclude employees from a tax-qualified ESPP $155,000 $160,000

Qualified Versus Nonqualified Retirement Plans

These yearly contribution limits for the well-known qualified retirement plans are a big reason why companies offer nonqualified plans: to let executives and other highly compensated employees save extra money for retirement with an elective nonqualified plan or an excess 401(k) plan. The deferred income is “nonqualified” because it does not fit the rules in the tax code that allow tax-qualified plans, such as 401(k) and 403(b) plans.

Nonqualified deferred comp allows you to put away income beyond the permissible contribution amounts of standard qualified retirement plans. For retirement planning, it can therefore bridge the considerable gap that arises between the amount of income that you will actually need in retirement and the amount of income that can be provided via your 401(k) plans and Social Security.

Nonqualified Deferrals Have Complex Rules

Nonqualified deferred compensation plans and their participants must follow the complex rules under Section 409A of the US tax code. These rules govern your deferral and distribution elections. The amounts that you defer can only be informally funded by your company, and they are at risk should the company enter bankruptcy proceedings.

The website myNQDC.com is a comprehensive resource on NQDC plans, including the basics, the deferral/distribution process, the risks, and the related financial and tax planning.

Social Security Wage Cap Also Rises In 2025

Set by the Social Security Administration, the Social Security wage cap will rise to $176,100 in 2025, up from $168,600 in 2024. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $10,453.20 in 2024 and will rise to $10,918.20 in 2025.

Social Security tax (up to the yearly limit) and Medicare tax (uncapped) are withheld at the time of deferral, as shown by an FAQ at myNQDC.com that has a handy annotated diagram of Form W-2 showing where these amounts are included.

Further Resources

For a table comparing the features of 401(k) plans and NQDC plans, and their relative advantages and disadvantages, see another FAQ at myNQDC.com. See also the website’s FAQ on the top NQDC-related issues in year-end planning.

SPECIAL WEBINAR

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Year-End & Year-Start Equity Comp Financial Planning

Thursday, Nov. 14 (2pm–3:40pm ET, 11am–12:40pm PT). See the webinar registration page for a detailed agenda. 2.0 CE hours for CFP, CPWA/CIMA, CEP, CPE, and EA

Join us for this lively webinar on year-end 2024 and year-start 2025 strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes. In 100 minutes, a panel of leading financial advisors will present practical insights and real-world case studies:

  • John P. Barringer (CFP®), Executive Wealth Planning
  • Rebecca Conner (CFP®, CPA/PFS™, RLP), Founder, SeedSafe Financial LLC
  • John Owens (CFP®, EA, ECA, CPWA®), Managing Partner, Brooklyn FI

Uncertainty about tax rates as the TCJA sunsets and the unpredictable future of the current stock-market boom make the need for expert guidance more important than ever, as this webinar will cover.

Register now. Time/date conflict? No problem! All registrants get the webinar recording, slide deck, and handouts.


Section 83(b) Election: Official IRS Form Coming Soon!

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Update (Nov. 8, 2024): The IRS has officially introduced its new form for the Section 83(b) election, Form 15620.

Today we bring you news of a different election: the Section 83(b) election, a tax move that is available for restricted stock and early-exercise stock options. Last month, at the annual conference of the National Association of Stock Plan Professionals (NASPP) in San Francisco, a staff lawyer with the IRS Office of Chief Counsel revealed that the agency is finalizing an official IRS form for the Section 83(b) election.

In the equity comp world, this is a very big deal. There are various scenarios with equity compensation—specifically restricted stock, stock options, and LLC interests—in which making a timely Section 83(b) election with the IRS can be an important move for tax planning and minimization. However, currently no official IRS form exists for making that election.

Three Scenarios Involving The Section 83(b) Election

Below are three situations in which a Section 83(b) election is an action to consider.

Grant Of Restricted Stock

Grants of restricted stock are made by public companies and by private companies in the early startup stage (sometimes called founders’ stock). When you receive a grant of restricted stock, the grant must vest before you own the shares. Normally, the value of the grant is taxed at the time of vesting. However, you can instead choose to pay tax on the value of the stock at grant (minus anything you paid for the stock) by making a Section 83(b) election with the IRS within 30 days of the grant date.

Essentially, by making the 83(b) election you are betting that the stock will appreciate substantially between grant and vesting, so you choose to be taxed on what you hope will be the lower value at grant. Additionally, you make an early start on the one-year holding period you must meet to be taxed at the long-term capital gains rate (lower than the short-term rate) when you sell the shares.

Note that the 83(b) election is not available for restricted stock units (RSUs).

Early-Exercise Stock Options

For employees in private companies who receive early-exercise stock options, i.e. options that can be exercised before vesting, an 83(b) election within 30 days of exercise is needed to change the regular tax treatment. You essentially purchase restricted stock with the same vesting schedule that the options had and pay taxes at exercise on any income from the spread (i.e. the difference between the stock’s fair market value and the exercise price). You also get an early start on the holding period for long-term capital gains.

LLC Interests

A limited liability company (LLC) has membership interests rather than shareholders. It can make equity-compensation-type grants in the form of profits interests or capital interests. Profits interests are more common, particularly for private-equity-backed companies.

Depending on how the grants are structured (a complex topic beyond the scope of this article), most tax professionals recommend an 83(b) election within 30 days of grant. With the right structure, these interests often have zero value at grant—i.e. no taxable income at that time—and long-term capital gains tax treatment at sale when the interests are held long enough.

Timing Of 83(b) Election Is Crucial

To be valid, a Section 83(b) election must be mailed to the IRS within 30 days of the grant date for restricted stock and LLC interests or the exercise date for early-exercise options. You send it by certified mail (return receipt requested), postmarked within that 30-day period, to the IRS Service Center where you file your tax return.

Currently, however, the IRS does not have an official form for the 83(b) election. You make the election in correspondence to the IRS that you or your tax advisor prepare, including all of the required information as indicated by guidance from the IRS. You also give a copy to your company.

This approach increases the risk of improperly filing the election or missing the deadline, which would make it invalid. Once the 30-day window has elapsed, you can’t make the 83(b) election to be taxed at the earlier time—with painful tax consequences should the underlying equity’s price later surge.

83(b) Election Carries Risks

The Section 83(b) election has risks. Once you have made the election and paid taxes, you cannot get those taxes back from the IRS if your employment ends before vesting or the equity becomes worthless. Should one of those outcomes occur, you may end up paying taxes on income that you never receive!

Moreover, unless you can prove to the IRS that you made a “mistake of fact” (very difficult to do), it’s almost impossible to revoke an 83(b) election after the initial 30-day election window of time. Therefore, you should speak with a tax professional (CPA, Enrolled Agent, lawyer) to be sure you understand how and why you are making this tax election.

New IRS Form Will Make 83(b) Election Much Easier

The welcome new Section 83(b) election form, expected to be IRS Form 15620, will be available as a downloadable PDF with fields for all the required information. I discovered that this new tax form is already listed in the long document table in an early September IRS notice on various topics published in the Federal Register. 

At first, the form will be mailed to the IRS, but under the IRS modernization program it will eventually be submissible by e-filing. The new form is far along in its development, I was told in a separate discussion with my IRS source, and it may be released this year.

See myStockOptions.com for more details on taxation, planning, and risks with the 83(b) election and on early-exercise stock options in startup/pre-IPO companies.

SPECIAL WEBINAR

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Year-End & Year-Start Equity Comp Financial Planning

Thursday, Nov. 14 (2pm–3:40pm ET, 11am–12:40pm PT). See the webinar registration page for a detailed agenda. 2.0 CE hours for CFP, CPWA/CIMA, CEP, CPE, and EA

Join us for this lively webinar on year-end 2024 and year-start 2025 strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes. In 100 minutes, a panel of leading financial advisors will present practical insights and real-world case studies:

  • John P. Barringer (CFP®), Executive Wealth Planning
  • Rebecca Conner (CFP®, CPA/PFS™, RLP), Founder, SeedSafe Financial LLC
  • John Owens (CFP®, EA, ECA, CPWA®), Managing Partner, Brooklyn FI

Uncertainty about tax rates as the TCJA sunsets and the unpredictable future of the current stock-market boom make the need for expert guidance more important than ever, as this webinar will cover.

Register now. Time/date conflict? No problem! All registrants get the webinar recording, slide deck, and handouts.


Advisors Reveal Top Tips For Stock Options, RSUs, ESPPs

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Equity awards are complex, and so is the financial planning. No single strategy fits all. You must link the necessary financial and tax decisions to your own personal situation and goals. However, there are some general financial-planning considerations to understand before you start. A recent myStockOptions webinar featured four leading advisors who routinely work with clients that have equity comp and company stock acquired from their grants. In the real-world case studies they presented, they discussed their core strategies for stock options, RSUs, ESPPs, and company shares.

Start With Your Personal Goals

All of the advisors who spoke in the webinar cited the complexity and highly personal nature of planning for equity compensation and company stock holdings. “I always start with clients by asserting that these are complex benefits,” said panelist Megan Gorman, the founder of Chequers Financial Management in San Francisco and the author of a highly anticipated forthcoming book, All The Presidents’ Money. Megan emphasizes the importance of “playing the long game” with her clients. “We have to keep them on strategy, and strategies are personal—ignore the watercooler talk.”

“I also start with the client’s personal and financial goals,” stated panelist Chloé Moore, the founder of her firm Financial Staples in Atlanta. “What are they wanting to accomplish in the short term and in the long term? What are their cash needs? What do they want their life to look like and how can we use these RSUs or other equity awards as a tool to help make those dreams reality?”

Equity Comp As Goal Accelerator

Chloé said she often frames this as “accelerating that timeline.” For retirement goals, the stock-sale proceeds can perhaps go toward saving more, investing more, and making retirement possible sooner. For short-term goals such as buying a house or paying off student loans, the proceeds from equity awards can bring those goals even closer to the present.

An important point that Chloé stressed is that you should “live off your base salary and not rely on occasional income from equity awards or bonuses to fund basic living expenses.” Stock compensation “is really something that clients need to achieve or accelerate financial goals,” she reiterated.

Be Realistic With Yourself

Danika Waddell, the founder of Xena Financial Planning in Seattle, raised the importance of personal comfort level and pragmatism in financial planning for equity comp and company shares. “I think it’s really important to keep in mind that even though there may be an optimal financial or tax strategy, it may not make sense for the client—whether they’re not comfortable with it or it’s too complicated or for whatever reason they are just not willing to do that strategy. You have to find something that’s going to work for that client.”

She pointed out that, oddly enough, the strategies which actually work for her clients are often not the ones that are optimal from a tax perspective or a financial perspective. They are successful, she emphasized, because the client will stick to them.

“Tune out the noise,” added Danika. It’s vital, she asserted, to craft and stick with a financial plan that is tailored for you, regardless of casual advice from those around you. “Almost all of my clients hear a lot of opinions from co-workers and on Slack channels. They may also be getting input from an uncle, a dad, a cousin. What I say to clients is that they may be smart people and know a lot about tax situations, they don’t know everything about your situation. They may be at a different life stage. They may be in a different tax bracket.”

Know How Much Tax Will Be Withheld

For most employees, 22% is the statutory federal withholding rate for supplemental wage income, such as income recognized from stock option exercises or RSU vesting, and it’s the rate that most companies use. (The required withholding rate rises to 37% for amounts in excess of $1 million during the calendar year.) Depending on your overall yearly income and tax bracket, the 22% withholding rate may not be enough to cover the taxes you actually owe according to your bracket rate.

“A lot of my clients’ companies now give employees the chance to add extra withholding on top of the 22%, so they can choose exactly the amount of withholding they want,” observed Chloé Moore. “If that’s a choice and it makes sense for the client, we’ll get that as well. If not, we’ll want to be sure they set aside cash to cover the tax bill.”

Quarterly estimated tax payments are one way to cover any shortfall in the tax withholding. Alternatively, you can put cash aside from stock-sale proceeds to pay the taxes with your tax return for the year.

Sell The Company Shares Or Hold Them?

This is the $100,000 question (or maybe even more). When you receive shares of your company’s stock via equity compensation, whether you sell or hold the shares depends on various factors. Some of those factors, especially personal ones, are under your control, while others stem from the tax rules, your company’s stock plan, or its blackout periods for insider-trading prevention. Nevertheless, many advisors often suggest immediately selling all or most of the shares received at RSU vesting, chiefly to diversify and thus avoid the risky overconcentration of your wealth in just the stock of your company.

Webinar panelist Daniel Zajac, the managing partner of Zajac Group in the Philadelphia area, often takes this approach. “Generally speaking, selling RSU shares right when they vest is where we lean with most of our clients, and then we figure out what to do with the proceeds,” he explained. “Are we going to cover taxes by putting money on the side, making estimated tax payments, running tax projections? Or are we going to take the rest of it and invest it, fund a goal, buy a house, doing whatever the client wants to do with that excess money.”

Diversification

Danika Waddell concurred—and pointed out the importance of diversifying. “This isn’t a blanket rule, but for many of my clients I recommend selling RSU shares soon as they vest and setting aside money for the taxes and just diversifying,” she said. “Many of the clients I work with come to me with already 60%, 70%, 80% of their net worth tied up in their company stock, so we’re absolutely working on diversification. If that’s not the case, it’s a little less critical. But for many people it’s just sell as soon as the shares vest.”

Danika recommends this course of action even more strongly for shares acquired via an employee stock purchase plan (ESPP). “If someone is going to participate in an ESPP, I always recommend selling the ESPP shares as soon as they become available. I don’t really want anybody to hold on to them. I’ve seen too many situations where it doesn’t pan out, and then the ESPP taxes are just so complex on top of that.”

Automate Selling Under Your Plan Where Possible

Automated selling is another recommendation that Danika favors. “I’m a big fan of automation. If your company allows you to set things to auto-sell, that leaves one less thing on your plate. Especially if your RSUs are vesting monthly, you otherwise have to go in and remember to sell shares.”

Daniel Zajac agreed. “As much as we can automate selling for clients, we’re all for it. It’s not uncommon for our clients to come in regularly with $50,000 or $100,000 of after-tax RSU money that’s been sold, and we then dump it into an investment account, where it builds and builds. And clients start to love that action, seeing that account get bigger and bigger over time.”

Danika noted that dispassionate automated selling can work well as part of a financial plan determined in advance, sometimes in the form of a Rule 10b5-1 trading plan if you frequently know material nonpublic information about your company. “Make it really simple so that you’re not constantly having to think about when should I sell, how should I sell, what should I wait for—removing as much as possible emotional decisions.”

Capital Gains Tax

What about the tax on capital gains when you sell shares? Avoid letting aversion to capital gains tax get in the way of your bigger-picture financial planning. “Don’t let the tax tail wag the planning dog,” quipped Megan Gorman. “I think it’s great that sometimes people focus on the tax, but sometimes you just have to sell. You pay the tax and you move on.”

Further Resources

The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. It is part of our Equity Comp Masterclass series of three webinars. For additional guidance and ideas, see the extensive resources in the section Financial Planning at myStockOptions.com, along with the website’s modeling tools and calculators for stock options, restricted stock, and restricted stock units.

SPECIAL WEBINAR

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Equity Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition

Wednesday, Sept. 11 (2pm–3:40pm ET, 11am–12:40pm PT). See the webinar registration page for a detailed agenda. 2.0 CE hours for CFP, CPWA/CIMA, CEP, CPE, and EA

Join us for this lively webinar on financial and tax planning for equity comp and shares in private companies. In 100 minutes, a panel of leading financial and tax advisors will present practical insights and real-world case studies:

  • Alfred Au (MS, CFP®), DiversiFi Capital
  • Meredith Johnson (CPA, CFP®), BPM
  • Kristin McKenna (CFP®), Darrow Wealth Management

Decreasing valuations for private company stock, the growth of private company liquidity programs, and the slowdown in IPOs make the need for effective guidance even more important, as this webinar covers.

Register now. Time/date conflict? No problem! All registrants get the webinar recording, slide deck, and handouts.


Big Income Hit From RSUs Or Stock Options? Use A Donor-Advised Fund (DAF) To Reduce Taxes While Being Charitable

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When your restricted stock units vest or you exercise stock options, you may have a sudden big spike in your taxable income for the year. To reduce your taxable income and therefore stay out of a higher tax bracket, one technique tax advisors recommend is to create a donor-advised fund (DAF) and put money into it. A DAF lets you make both smart tax-planning decisions and charitable donations to causes you care about.

The strategy has become popular. DAF gifts (called “grants”) have become a key source of funds for charities and other nonprofits. One wealth advisor recently told us he regards this as “the summer of DAFs.”

The workings of DAFs, their tax benefits for you, and the timing flexibility they provide for financial contributions are discussed extensively elsewhere on the internet. This article looks at the hard part that is often not talked about: how do you decide when it makes better financial sense to donate directly with the DAF rather than by credit card, check, stock, or Venmo?

Huge Growth In DAF Assets

The assets in DAFs have grown substantially. According to a report from the National Philanthropic Trust, DAFs now hold nearly $230 billion in 2 million accounts. The publication The Chronicle of Philanthropy reveals that this growth in DAFs is changing charitable giving in many ways—though not all of them are positive, as discussed in an article from The Boston Globe.

Example Of Major DAF Giving And Growth

The Pan-Mass Challenge (PMC), a cycling event held every summer in Massachusetts since 1980, now raises more money for charity than any other single athletic fundraising event in the world. The PMC bicycle fundraiser for the Dana-Farber Cancer Institute in Boston will reach $1 billion in donations this year with its 2024 event, to be held the first weekend in August. With a 25% increase in DAF gifts as of May 31, 2024, over 60% of the PMC’s fundraising growth this year has come from DAF giving, according to Michele Sommer, the CFO of the PMC.

Disclosure: This summer, myStockOptions editor-in-chief Bruce Brumberg will raise funds for and ride in the PMC for his 36th straight year, and this will be his wife’s 33rd year of doing so.

New tools have been developed to make grants from DAFs faster and simpler than ever. These include DAFpay, which can be embedded in online donation forms. It allows donors to select from a list of DAF sponsors to make contributions. We tested DAFpay with a donation to the upcoming 1st PMC ride by the son of Editor-in-Chief Bruce Brumberg. It required fewer keystrokes than entering in credit-card information and was as easy as using PayPal.

Quick Tax Review Of DAFs

When you make a donation to a DAF, that amount is eligible for the charitable deduction on your tax return without the need at that point (or perhaps ever) to pick the nonprofits receiving the funds. When you’re making a very large cash donation to a DAF (or to any charity directly), understand that the tax deduction is limited to 60% of your adjusted gross income (AGI) per year, and you can carry forward what’s not used on that year’s tax return for five years.

A DAF donation reduces your taxable income for the year. Depending on your tax bracket, the DAF donation can therefore lower your taxes, assuming the total of your itemized deductions on Schedule A of your Form 1040 tax return (includes charitable donations) is higher than the year’s standard deduction that everyone gets. (In 2024, the standard deduction is $14,600 for single filers and married couples filing separately, and it is $29,200 for married joint filers.)

Related strategies that financial advisors suggest include using a DAF to consolidate or bunch donations into one year to maximize your itemized deductions. DAF donations are also an effective strategy for tax planning in years when you have a big income increase that would otherwise push you into a higher tax bracket. Common sources of an income spike include a vesting of restricted stock units (RSUs) from your employer, an exercise of nonqualified stock options, a Roth IRA conversion, or a sale of your company.

Basic DAF Gifting Rules

Donations to DAFs are irrevocable. While the money invested in your DAF account accumulates free of tax, you may not extract any funds from the DAF for personal use.

However, having a DAF does not impose any legal pressure on you to make grants from it. Unlike private foundations, which under IRS rules must distribute 5% of their net asset value per year, you have no legal requirement to make gifts from a DAF. Private foundations can also count DAF contributions towards the 5% of net assets they must annually distribute, and they can convert to a DAF under a legal process—one reason for the huge growth in DAF assets.

This lack of a rule for minimum DAF payouts has its critics. However, the IRS and Congress have shown little desire to require mandatory grants from DAFs.

While the law does not require you to make grants from your DAF, some DAF providers or sponsors—such as Fidelity Charitable, Vanguard Charitable, Schwab Charitable (now DAFgiving360), and National Philanthropic Trust—do have minimal mandates for regular grants.

For example, under the rules of a DAF at Fidelity Charitable (a former client of myStockOptions), you need to make a grant at least once every two years. Otherwise, Fidelity Charitable will make a donation from your Giving Account equal to 5% of the assets in it. After the first year of inactivity, Fidelity Charitable contacts the account holder to encourage grant recommendations.

Let’s look at seven reasons to use your DAF to make grants to charities and other nonprofits.

1. Dedication To Charitable Giving

Presumably, you set up your DAF mostly because you are generous and charitably inclined, not just for tax reasons, so you now need to hold yourself accountable to thoughtful use of the funds. After you have contributed money to the DAF, you will want to focus on how much to grant from it and to which nonprofits.

“You’ve already made your personal budgeting and tax decision on how much to put into your DAF,” explains Mitch Stein, Head of Strategy at Chariot, the company behind DAFpay. “Now’s the time to experience the joy of giving and focus on how you want to allocate the funds in your DAF to causes or organizations you believe in.”

“When giving from your DAF, you are able to support the organizations you love with money already set aside for philanthropic giving, with zero impact on your cash or credit-card payments,” emphasizes Karyn DeMartini, VP of Principal & Planned Giving at the March of Dimes.

The large amount of ungranted funds sitting in DAFs can be frustrating for nonprofits that need funding. The 2024 National Study On Donor-Advised Funds found that 22% of DAF accounts did not make any grants during the prior three years. In an average year during that period, 37% made no grants, and the median payout for all DAF accounts was 9% (15% after removing inactive accounts).

To encourage you to make DAF grants, an organization called #HalfMyDAF offers matching funds to donors who commit to spending down at least half of their DAF accounts each year. Its website has the details on the process and the deadlines for matching donations.

Jennifer Risher (author, speaker, and former Microsoft product manager) and her husband David Risher (the current CEO of Lyft) founded the #HalfMyDAF matching program. “We created the #HalfMyDAF matching program to inspire donors to put their money to work now, when it can do the most good,” says Ms. Risher. “Along with our partners, we have moved over $58 million from DAFs to nonprofits over the past four years.”

2. Better Organization And Tracking

When you make numerous donations in any year, whether small or large, it can be challenging to keep track of all the recipients and avoid duplication. To help you organize your gifting, most DAF providers have a website dashboard that lets you see in one place all the grants you have made.

3. No Credit-Card Fees

When you give with a DAF instead of a credit card, you’re saving the nonprofit anywhere from 3% to 5% in total fees charged by its credit-card processor (unless you gross up your donation). Venmo too has fees, though they are lower.

4. Maxed Out On Tax-Deductible Donations

Donations coming from your DAF do not give you a tax deduction, as would a direct donation to a charity by credit card, check, or Venmo. You already received the tax deduction when you contributed to the DAF.

If you know already that you’re going to hit your goal for the year in tax-deductible donations—perhaps via putting more money into your DAF, by some other big direct donation to a charity, or through setting up a charitable-type trust—then use the DAF to make the donation.

5. Smoother For Stock Or Complex Assets

DAFs can quickly handle and liquidate stocks and other assets more efficiently than many nonprofits can. Let’s say you have low-tax-basis stock in Nvidia, Apple, Alphabet (i.e. Google), or Tesla that you bought years ago and has since rocketed upward in value. You may want to donate the shares, as selling them would trigger significant capital gains tax.

You can donate the stock to the DAF for the tax deduction at its current share price and then use the funds in the DAF to make the donation. For donations of appreciated stock you have held long-term, the tax deduction is limited to 30% of your adjusted gross income (AGI) per year, but you can carry forward the unused portion on your tax return for five years.

6. Attention And Preferential Treatment…

When you use a DAF and the charity is aware of the donor behind it, the grant sends a signal that you’re a valuable philanthropist who enjoys giving to the organization’s cause. That can result in special invitations and attention.

7. …Or Total Anonymity

Grants from your DAF can go to any qualified charity in the US or abroad. You can set up the DAF with any name and title, and you can usually change those whenever you want by simply submitting a form. Grants from the DAF can therefore be anonymous or at least not associated with you personally.

If you are concerned that the charity you are giving to could be perceived by some people or your employer as controversial, using the DAF can mask your identity. It’s also a way to prevent the charity from sharing your personal contact information with other charities. The lack of transparency with DAFs is another area of potential legal change, though that is unlikely in the near future.

Equity Comp Masterclass: Special Three-Part Webinar Series

myStockOptions Equity Comp Masterclass

At the myStockOptions Webinar Channel, our Equity Comp Masterclass series of three webinars in May and June proved to be one of our most popular offerings yet. You can now watch the full series on demand. Each webinar includes the detailed slide deck, checklists, and handouts via the webinar player.

Register for the full masterclass series of three webinars at a special package price ($395) or for any of the individual webinars, listed below:

Part 1: Stock Options ($149)
1.0 CE credit for CFP, CPWA/CIMA, and CEP/ECA

Part 2: Restricted Stock/RSUs & ESPPs ($149)
1.0 CE credit for CFP, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors ($189)
2.0 CE credits for CFP, CPWA/CIMA, and CEP/ECA

Parts 1 and 2 cover essential topics (including taxation) and feature plentiful examples. These two 60-minute webinars are presented by Bruce Brumberg (JD), the editor-in-chief and co-founder of myStockOptions.com and a Forbes.com contributor. Bruce is a highly respected expert who explains these topics in a practical, memorable, and engaging way.

Part 3 brings together all the fundamentals and taxation. The webinar features leading financial advisors actively working with clients who have equity compensation. They provide their top tips and real-world case studies. Panelists:

  • Megan Gorman (JD), Founder, Chequers Financial Management
  • Chloé Moore (CFP®), Founder, Financial Staples
  • Danika Waddell (CFP®, RLP®, CSLP®), Founder, Xena Financial Planning
  • Daniel Zajac (CFP®, EA), Managing Partner, Zajac Group
  • Bruce Brumberg (JD), Editor-in-Chief and Co-Founder, myStockOptions (moderator)

Whether you are new to stock comp or want to sharpen your knowledge, these webinars will provide practical info and insights to maximize your success.


2024 Planning: 3 Tax Numbers All Employees Should Know

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The early part of the year, before tax season kicks in, is a good time to consider tax planning for your income in the year ahead. That includes knowing the federal tax-related numbers for 2024 that are crucial for all employees, their paychecks, and their financial planning.

The IRS and the Social Security Administration annually adjust for inflation a myriad of key numbers in federal tax-law provisions. Amid this onslaught of tax figures, it can be difficult to spot the adjustments that matter to you.

Some apply only to very high-net-worth executives and other super-wealthy people, such as the federal estate-tax exemption (in 2024, $13.61 million for unmarried taxpayers and $27.22 million for married taxpayers). The more obscure adjustments are chiefly of interest only to administrators of corporate benefit plans and other experts (like me) who keep track of this stuff. For example, the income definition of “highly compensated employee,” which affects eligibility for employee stock purchase plans (ESPPs) and 401(k) plan non-discrimination testing, is $155,000 in 2024.

So let’s cut through the clutter and focus on the essential points. Below are three sets of tax figures in 2024 that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings.

1. The Social Security Wage Base

The Social Security tax (at a rate of 6.2%) applies to wages up to a maximum amount per year that is set annually by the Social Security Administration. Compensation income above that threshold is not subject to the Social Security tax. (By contrast, the Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level.)

The Social Security wage cap is $168,600 in 2024, up from $160,200 in 2023. This means the maximum possible Social Security withholding in 2024 is $10,453.20. Once your income is over the wage cap and you’ve maxed out the withholding, you’ll see 6.2% more in your paycheck.

2. Your Income-Tax Bracket And Withholding

If you’re an employee, your company withholds taxes from your paycheck according to the information on your Form W-4. The IRS recommends that you consider completing a new Form W-4 whenever your financial, personal, or job situation changes.

The table below shows the federal income-tax brackets and their rates. It can help you understand how an additional amount of compensation would be taxed at your marginal tax rate: the percent of tax you pay for an additional dollar of income in your current tax bracket. That number tells you whether the withholding as indicated on your W-4 will cover the total tax you will owe for 2024. To avoid "penalizing" additional income in your mind, be sure you know your effective or average tax rate.

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Need To Pay Estimated Taxes?

Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate for that income. Instead, they apply the IRS flat rate of 22% for supplemental income (the flat rate is 37% for yearly supplemental income in excess of $1 million).

As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% does not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the 2024 tax return you will file in 2025, pay estimated taxes during 2024, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall. Speak with a qualified tax professional, such as a CPA or Enrolled Agent, when you’re uncertain about the best approach to take.

If estimated taxes are the route you choose, know that due dates for quarterly estimated tax payments in the 2024 tax year are April 15, June 17, and September 16 of 2024 and January 15 of 2025. (The IRS routinely postpones these due dates for taxpayers in areas of the United States affected by natural disasters. See the IRS website section Tax Relief In Disaster Situations.)

3. Your Contribution Limit For Qualified Retirement Plans

In 2024, you can elect to defer up to $23,000 from your paychecks into qualified retirement plans, such as your 401(k) (or your 403(b) if you work for a nonprofit, school, or government agency). That annual limit rose from $22,500 in 2023.

The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $69,000 in 2024, a $3,000 increase over last year’s amount. If you are 50 or older, you can contribute an additional $7,500 per year.

The amount of compensation income that can be considered in the calculation for qualified deferrals grew to $345,000 in 2024. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.

Want To Defer More Income?

Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan. For more on these plans, see the website myNQDC.com.

Inflation Adjustments For Health Savings Accounts

While not all employees have them, health savings accounts (HSAs) are also getting an increase in their pre-tax contribution limits for 2024 in response to inflation. HSAs are available only for high-deductible health plans.

The IRS has raised the yearly contribution limit for HSAs. For self-only coverage it is $4,150 in 2024, up by $300 from last year (a 7.8% increase). For family coverage it is $8,300 in 2024, up from $7,750 in 2023 (a 7.1% increase). The limit for HSA catchup contributions, available for people 55 or older, remains $1,000. With more companies setting up pre-tax payroll deductions for HSAs and matching employee contributions, these increases could be significant for many people as the cost of health care continues its relentless rise.

IRS Resources

Here are resources with more details on the many adjusted 2024 tax numbers:


WEBINAR: Preventing Tax-Return Mistakes With Stock Comp & Stock Sales

Wednesday, February 14
2pm–3:40pm ET, 11am–12:40pm PT
2.0 CE credits for CFP, CPE, EA, CPWA, CIMA, CEP, ECA

Tax-seasonThe 2024 tax season brings extensive risk for costly mistakes with tax returns involving stock compensation, including cost-basis reporting for stock sales. The uneven and volatile markets of the past year, economic uncertainty, and growing IRS audit resources make the need for expert tax guidance more important than ever.

Register for this lively educational webinar on tax-return topics for stock comp. In 100 minutes, it will feature insights from three tax experts on issues with tax returns involving equity comp and sales of company shares. The panelists will also present real-world case studies on how to use information in tax returns to create better financial plans.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.


Year-End 2023: Advisor Insights On How Market Uncertainty Impacts Planning For Stock Options, RSUs, And ESPPs

When the wreaths and holiday lights come out, it's time for year-end financial and tax planning. Year-end planning is crucial for employees who have equity compensation (such as stock options and restricted stock units), participate in an employee stock purchase plan (ESPP), and/or have holdings of company shares.

Year-end 2023 is a relatively straightforward time for financial planning compared with what lies ahead for year-end 2024 after the upcoming election. The prospect of tax changes will then loom large. For now, remember that the tax cuts which became effective in 2018 will expire at the end of 2025 unless Congress extends them. The possibility of tax increases after 2025 may already start to affect your planning in 2023.

Even without any consideration of future tax changes, the current uneven markets and economic uncertainty can make year-end planning tricky. To help keep the season merry and bright, myStockOptions.com recently held a webinar on year-end planning that featured three leading financial and tax advisors with expertise in equity comp. Below we summarize some of the special insights they revealed for year-end 2023 and year-start 2024.

Volatile, Uneven, Sideways: Stock Market And Job Concerns Affect Year-End Approaches

“We consider the markets over the last year to be what we call a sticky swamp,” observed webinar panelist Rebecca Conner (CFP, CPA, RLP), the founder of SeedSafe Financial LLC, based in Austin, Texas. “It’s been good, it’s been bad, it’s been in the middle, it’s been sideways.”

Amid these uneven markets of 2023—in which some companies’ stocks rose substantially while others fell—her firm applies a holistic approach that considers the client’s overall past year and outlook for next year in their financial picture and employment. “We’ve had clients that were laid off and are still looking for jobs,” she gave as an example. “We’re trying to keep who they are and where they are in perspective. Then, based on that, we look at what we may want to do.”

Approaches she mentioned for down or volatile stock prices include harvesting capital gains and tax losses. With job loss or lower compensation, said Rebecca, other strategies involve converting pre-tax IRAs to Roth IRAs. “On the plus side,” she added, when stock prices are down “there may be opportunities such as exercising more incentive stock options (ISOs) without triggering the AMT.” Alternatively, for clients at companies where the stock price has jumped this year, she considers the tax advantages of donating the stock, including to a donor-advised fund.

Rebecca’s theme of tax-loss harvesting and loss carry-forwards was echoed by panelist John Owens (CFP, EA, CPWA), Director Of Financial Planning at Brooklyn FI, based in New York City. “The market is up lately, but couple of months ago, the markets looked terrible,” he noted. “It was a really rough October. Are there ways to alleviate a concentrated position without a tax hit because you have capital losses?”

“Opportunity For A Wakeup Call”

John Barringer (CFP), the Managing Partner of Executive Wealth Planning in Denver, Colorado, likes to step back with his clients at year-end and assert the importance of financial goals as their starting point. “Equity is income. How does that fit with retirement? How does that fit in with paying off the mortgage or paying for the kids’ college education? It really starts with goals, and then equity is a tool.”

At year-end, he continued, this leads to a discussion of assessing what grants you have, what grants you expect in the coming year, and what option grants may be about to expire. “You’d be surprised how many executives are so busy doing their jobs that they don’t even pay attention. Year-end is an opportunity for a wakeup call to focus on what they told me they wanted to do to reach their goals.”

Multi-year planning is key, John emphasized, to consider whether to exercise stock options this year or next, and to know what RSUs are vesting or performance share grants may pay out. “We always talk at the end of the year about income tax bracket space. How much room is there to exercise stock options without going into the next higher tax bracket?”

Year-Start 2024: Points To Consider

Comprehensive year-end planning includes not just the end of 2023 but the start of 2024. A theme John Owens raised is planning for taxes on income that is coming up with vestings of restricted stock or restricted stock units (RSUs) in the year ahead.

The flat federal tax rate of withholding at restricted stock/RSU vesting for most employees may not cover all of the taxes you owe to the IRS, depending on your tax bracket. The flat withholding rate for most employees’ supplemental wage income is 22% (it is 37% for yearly total amounts in excess of $1 million). One way to remedy a tax shortfall is to pay quarterly estimated taxes.

“Prepare for 2024 estimated taxes for RSU under-withholding,” John advised. One of the tasks he likes to do with clients as part of year-end planning is to get ahead of the game and map out the estimated payment for at least the first quarter.

John Owens also recommended thinking about enrollment in any company employee stock purchase plan (ESPP). “Are we contributing? Are we optimizing that as we look ahead at the coming year?”

John Barringer explained that in his approach to clients, the early-year window is “a mirror of the end of the year—same basic questions as we had then.” He again emphasized the importance of knowing—and giving your financial advisor—a complete picture of your equity comp and company shares. “I’m surprised how many times clients will go into the brokerage website and click and sell something without telling us what they’re doing.”

As a CPA, Rebecca Conner has tax season in mind. “In early 2024, we’ll be getting ready for tax returns, so we’re looking for forms. We’re making sure we know where things are or when things are due. We’re re-checking cash to be sure we have enough for 2023 taxes as well as all of our strategies for 2024.”

Preparing For Job Change Or Job Loss

If you think you may switch companies in 2024, answers to key questions will help you negotiate severance or a new compensation package. “What option grants will expire soon or could expire if you’re laid off?” John Barringer asks his clients. “What grants do you expect to receive in the first quarter or first half of the year? What RSUs vest in the coming year?”

Rebecca Conner seeks to clarify her clients’ job expectations and career goals. Any moves in the year ahead could affect income and the need to exercise options sooner than anticipated.

Special Issues For Incentive Stock Options (ISOs)

Special issues arise with ISOs and the alternative minimum tax (AMT). You can trigger the AMT when you exercise ISOs and then hold the shares beyond the calendar year of exercise. Any AMT you pay often can eventually be recovered in later years via the AMT credit available under the tax code.

When your ordinary income tax climbs above your calculated AMT, you can use up more of that credit until the two taxes equal each other. “At this time of year, if you haven’t sold the ISO stock [from an exercise earlier in the year] and the price is higher, you may be able to capture some of the AMT credit,” John Owens explained. He takes an approach that hunts for AMT credits. “It may make sense to do some disqualifying dispositions [early sales] to accelerate ordinary income that will unlock your AMT credit created by a prior year’s ISO exercise, especially if the stock price has appreciated throughout the year.”

John further discussed the importance of year-start planning for ISOs. “I love an early-year ISO exercise,” he enthused. “In early 2024, we’ll be talking with clients about whether to do ISO exercises and holds.”

Exercising ISOs in January gives you the rest of that calendar year to see where the stock price goes, he explained. This allows plenty of time to make decisions about whether to sell the shares or whether to hold them beyond year-end (but potentially get locked into the AMT). For startup companies, with 409A valuations staying flat or declining, he also suggests this as an early-year strategy to consider, though it involves additional risks and lack of liquidity for the shares.

“I am also a lover of ISO exercises early in the year,” chimed in Rebecca. She particularly favors that approach when the stock price is depressed and/or when the company’s outlook is positive. “Then if something happens during the year you can always sell the stock if you need to and disqualify it.”

Further Resources

The webinar in which the panelists spoke is available to stream on demand. It’s one of many webinars on equity comp planning at the myStockOptions Webinar Channel. Meanwhile, myStockOptions.com provides abundant education and guidance on year-end financial and tax planning for equity comp and company shares in its section Year-End Planning.

AdvisorFind Directory
Shutterstock_2357193485Find a financial, tax, or legal advisor with experience in stock compensation

Stock compensation raises many questions.

  • How much should you contribute to your ESPP?
  • When should you exercise stock options?
  • Should you sell or hold restricted stock at vesting?
  • How can you diversify your company stock holdings?
  • How can you minimize your tax bill?
  • How do you negotiate for stock compensation in your employment agreement?

While myStockOptions.com is a good place to learn about concepts, issues, and general strategies in equity compensation, at some point you may need an advisor to help with your unique situation. Yet finding a good advisor can be hard when you are busy and don't know where to start. The AdvisorFind Directory from myStockOptions.com is for you.

  • Identify and contact an expert who can provide specialized professional guidance on equity compensation.
  • Search for advisors by geographical area, type of advisor, years of experience, minimum portfolio size, and other key criteria.
  • Look up resources for performing background checks on advisors.

Searching AdvisorFind is free and does not require registration at myStockOptions.com.


Two Special Tax-Return-Reporting Issues In 2023: Volatile Stock Prices And Employee Mobility

tax sadness

Over a decade passed between the Great Recession of 2008–2009 and the volatile market downturn of 2022. As a result, many younger employees with equity compensation—whether stock options, restricted stock units, employee stock purchase plans, and/or and company shares—are new to the impacts of fallen stock prices and capital losses in their tax-return reporting. For some, the 2023 filing season will be the first time they hear the terms "tax-loss harvesting" and "wash sales."

Another widespread issue for tax reporting that is new to many employees involves interstate employee mobility and the allocation of income between states. That is, of course, on the rise as more employees than ever work remotely in a different state from their employer, whether in one place or as “digital nomads” moving from state to state.

In a recent myStockOptions webinar on tax returns that I moderated (Preventing Tax-Return Mistakes With Stock Comp & Stock Sales), three leading financial and tax advisors with expertise in equity comp presented ideas and tips for preventing costly tax-return errors in 2023. This article summarizes some of the key points they made about capital losses, wash sales, and employee-mobility issues.

Down And Volatile Stock Prices? Consider Tax-Loss Harvesting...

Amid the down and volatile stock markets of 2022, many employees with stock comp have capital losses from selling company stock whose value fell after vesting, exercise, or purchase. On your tax return, you can apply your capital losses to offset your capital gains, thus reducing your taxable capital gains income. After that, you can also net up to $3,000 (for joint filers) of capital losses against ordinary income (e.g. your salary, income from RSU vesting, income from NQSO exercise). Any usused capital losses are carried forward. This is called tax-loss harvesting.

Webinar panelist Stephanie Bucko, a CPA and the co-founder of Mana Financial Life Design in Los Angeles, routinely uses this strategy to help reduce her clients’ taxable income on tax returns. “It definitely impacts the strategy. You can cut out a ton of taxes if you’re able to offset gains with losses.” She uses software to capture her clients’ full financial picture and also talks through their history to identify any capital losses that may be available to net against gains.

“It is likely for tax year 2022 that clients will have capital losses on their tax return,” Stephanie concluded. She pointed out that selling loss-makers can be useful not only to harvest the loss but also to diversify out of a concentrated stock position. “This presents an opportunity for clients with concentrated positions to reduce risk without suffering tax consequences. Our recommendation is to review Schedule D for these tax losses.”

Tax-loss harvesting is also pursued by webinar panelist Daniel Zajac, a CFP, Enrolled Agent, and managing partner of Zajac Group (Exton, PA). He noted that the volatile and declining stock prices of 2022 presented opportunities to take advantage of capital losses not only to offset any capital gains in 2022 but also to carry remaining losses forward to future tax years.

“In a year like last year,” Daniel went on, “I think that a lot of advisors were talking to clients about capturing some losses and carrying them forward. For many advisors that’s part of the process at year-end, and it’s funneled through to the tax preparer to be sure it gets accounted for.”

...But Watch Out For Wash Sales

Be aware that there are limits on tax-loss harvesting for those who try to be too clever with it. If you sold loss-generating stock before the end of 2022 for tax-loss harvesting and then repurchased the same stock in January to keep your investment in it, you will run into the “wash sale” rule. This is triggered by a sale of stock at a loss coupled with the repurchase of the same stock within 30 calendar days before or after the sale.

The result? Your capital loss is disallowed on your tax return for that year, with the basis and holding period added to the replacement shares that you purchase.

Most experts believe that option exercises, RSU vestings, and ESPP purchases are “buys” of company stock for tax purposes. You want to watch out for monthly RSU vestings, as these will trigger a wash sale if you have also sold company stock at a loss within 30 days before or after.

Your brokerage firm will usually track and report wash sales by account. However, it may not do this across different accounts that you (and your spouse) have at the firm and at other brokers. Therefore, you and/or your tax-return preparer must consider trading activity in securities across all the accounts you have.

“The first thing I try to do is to educate my clients to avoid the issue,” chuckled webinar panelist Dan B. Hodgin, a CPA and the owner of Silicon Valley Tax Group (Campbell, CA). “But obviously that can’t always be accomplished.”

How should you track all of this? First, he said, you calculate the number of shares sold during the year. “Sometimes it looks as if clients have wash sales throughout the year, but by the end of the year they don’t. They’re all netted out. But if they do in fact have wash sales that are going to carry to a future year, you really just have to do a manual calculation. There’s really no other way.”

You report on Schedule D the wash-sale amount, which may differ from the amount on the Form 1099-B you receive from the broker, Dan explained.

“In a future year, when those shares are sold that have an adjusted basis, you’re going to adjust in the opposite direction. You want to be sure you have full backup for that. In the year when you report the wash sale, the IRS is not going to bother you or question you. They will just see less of a loss, and that’s the end of that. But in the year when you have a bigger loss than the one on the 1099-B for that year, because you are adjusting for those previous wash sales that have now been cleared out, that’s when the IRS is going to have questions.”

Dan observed that many taxpayers haven’t experienced the issue of wash sales amid the rising stock markets of the past 10 years or so. “But with down markets and 80,000 new IRS agents, I’m going to be very careful with wash sales,” he stated. “I’m going to get a full inventory of shares and track those wash sales and the basis outside the brokerage account. If they’re not tracking wash sales on RSUs or ESPPs, then you have to. It’s the only way.”

“What if wash-sale RSU shares were sold in the same calendar year?” asked a webinar attendee. “If you generate a wash sale in February or March and then sell all the shares you have by December, I’m not going to put it in,” replied Dan. “The two are just going to wash each other out. I’m going to report it only if it has a net effect on the tax return at the end of the year.”

For more details on wash sales, see another recent myStockOptions blog commentary: Selling Stock At Year-End To Harvest Losses? Don't Get Tangled In The 'Wash Sale' Rule.

Remote Work And Digital Nomads: Issues With Employee Mobility

Generally, each state you live in determines what income is taxable and when. Many companies report income to and withhold taxes for only the state where you live when restricted stock units (RSUs) vest or when you exercise nonqualified stock options (NQSOs).

However, other states where you lived during the vesting period may contact you later if its tax officials learn of this stock comp income. The state’s tax authorities may seek a proration of your compensation income for your former residence, basing their tax on the part of the vesting period during which you performed services in their state.

The general rule for sourcing and allocating stock comp income is the number of days worked in the state divided by (for RSUs) the number of days between the grant date and the vesting, or (for NQSOs) the number of days between the grant date and either the vesting or exercise date, depending on the state rules.

In the myStockOptions webinar, panelist Dan Hodgin gave some key guidance for mobile employees. “Get a travel history for the current year,” Dan recommended. “Establish a residency history for the duration of the vesting schedule.”

This is important, he explained, because you can’t necessarily trust your Form W-2 on income determination. “Payroll department staff are not tax experts,” he cautioned, “and the complexity of this issue has grown exponentially since remote working became more readily available.”

State reporting of state-sourced wages on Form W-2 can vary, he added. “New York, for example, requires state wages to equal federal wages. Sometimes the year-end paystub can provide a more accurate state breakdown.”

Once you have your records in place, compare your fact pattern to your W-2, Dan advised. “If the W-2 does not match the fact pattern, ask your company to amend it. If you can’t get the company to amend the W-2, adjust the information on the tax return. Make sure you can back up your allocation with a strong fact pattern.”

With that fact pattern documented, you will be ready for any notice from the “aggrieved” state. He also warned employees to “be wary of low- or no-tax states versus high-tax states.”

Additional Tax-Reporting Resources

The 100-minute webinar in which these tax experts spoke, Preventing Tax-Return Mistakes With Stock Comp & Stock Sales, is available on demand along with many other on-demand webinars at the myStockOptions Webinar Channel.

For guidance on the tax-return reporting for stock compensation and sales of company shares, including annotated diagrams of Form W-2, Form 8949, Schedule D, Form 3921, and Form 3922, see the myStockOptions Tax Center.


2023 Tax Planning: The 3 Numbers All Employees Should Know

tax zen

Before tax-return season sets in, putting your focus on your 2022 income, this is a good time to meditate on your tax planning for 2023. That includes the federal tax-related numbers for 2023 that are crucial for all employees, their paychecks, and their planning.

The IRS and the Social Security Administration annually adjust for inflation a myriad of key numbers in federal tax-law provisions—and in 2023, given the economic cycle we're in, some of these changes are bigger than in past years. However, it can be difficult to spot the adjustments that matter to you.

Some apply only to very high-net-worth executives and other super-wealthy people. For example, there's the federal estate-tax exemption (in 2023, $12.92 million for single taxpayers and $25.84 million for married joint filers). Others of interest mainly to administrators of corporate benefit plans and other experts (like us here at myStockOptions) who keep track of this stuff. For example, the income definition of “highly compensated employee,” which affects eligibility for employee stock purchase plans (ESPPs) and 401(k) plan non-discrimination testing, is $150,000 in 2023.

This article clears away all that to focus your mind on the essential points for you. Below are the top three sets of tax figures in 2023 that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings.

1. The Social Security Wage Base

The Social Security tax (at a rate of 6.2%) applies to wages up to a maximum amount per year that is set annually by the Social Security Administration. Income above that threshold is not subject to the Social Security tax. (By contrast, the Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level.)

In 2023, the Social Security wage cap is $160,200, up from $147,000 in 2022. This means the maximum possible Social Security withholding in 2023 is $9,932.40. Once your income is over the wage cap and you’ve maxed out the withholding, you’ll see 6.2% more in your paycheck!

2. Your Income-Tax Bracket And Withholding

If you’re an employee, your company withholds taxes from your paycheck according to the information on your Form W-4. Showing the federal income-tax brackets and their rates, the table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate, i.e. the percent of tax you pay for an additional dollar of income in your current tax bracket. That number tells you whether the withholding as indicated on your W-4 will cover the total tax you will owe for 2023. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.

Need To Pay Estimated Taxes?

Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate for this income. Instead, they apply the IRS flat rate of 22% for supplemental income (the rate is 37% for yearly supplemental income in excess of $1 million).

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As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% does not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the 2023 tax return you will file in 2024, pay estimated taxes during 2023, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall. Speak with a qualified tax professional, such as a CPA or Enrolled Agent, when you’re uncertain about the best approach to take.

If estimated taxes are the route you choose, know that due dates for quarterly estimated tax payments in the 2023 tax year are April 18, June 15, and September 15 of 2023 and January 16 of 2024. (The IRS routinely postpones these due dates for taxpayers in areas of the United States affected by natural disasters. See the IRS website section Tax Relief In Disaster Situations.)

3. Your Contribution Limit For Qualified Retirement Plans

In 2023, you can elect to defer up to $22,500 from your paychecks into qualified retirement plans, such as your 401(k). That annual limit increased from $20,500 in 2022.

The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $66,000 in 2023, a $5,000 increase over last year’s amount. If you are 50 or older, you can contribute an additional $7,500 per year, a limit that also went up in 2023.

The amount of compensation income that can be considered in the calculation for qualified deferrals grew to $330,000 in 2023. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.

Want To Defer More Income?

Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan. For more on these plans, see the website myNQDC.com.

Inflation Adjustments For Health Savings Accounts (HSAs)

While not all employees have them, health savings accounts (HSAs) are also getting an increase in their pre-tax contribution limits for 2023 in response to inflation. HSAs are available only for high-deductible health plans.

The IRS has raised the yearly contribution limit for HSA self-only coverage to $3,850, up by $200 from last year, and for family coverage it is now $7,750, up from $7,300 in 2022. The limit for HSA catch-up contributions, available for people ages 55 or older, remains $1,000. With more companies setting up pre-tax payroll deductions for HSAs and matching employee contributions, these increases could be significant for many people as the cost of health care continues its relentless rise.

IRS Resources

Here are resources with more details on the many adjusted 2023 tax numbers:


WEBINAR: Preventing Tax-Return Mistakes With Stock Comp & Stock Sales

Wednesday, February 15
2pm–3:40pm ET, 11am–12:40pm PT
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, CEP, ECA

Tax-seasonThis tax season brings extensive risk for mistakes with tax returns involving stock comp. Complications in tax reporting due to the volatile markets of 2022, along with more IRS agents for audits, make the need for expert tax guidance more important than ever.

Register for this lively educational webinar on tax-return topics for stock comp. In 100 minutes, it will feature insights from three tax experts on issues with tax returns involving equity comp and sales of company shares. The panelists will present real-world case studies on how to use information in tax returns to create better financial plans.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.


Leading Financial Advisors Unbox Year-End Planning Amid Down And Volatile Markets Of 2022

Gifts and donationsAfter a tumultuous year of stock-price volatility and declines, year-end financial and tax planning in 2022 may be trickier than usual for some people with equity comp and holdings of company shares. This was the emphasis of a popular webinar we held at the start of December: Year-End 2022 Financial & Tax Planning For Equity Comp. In the spirit of the season, leading advisors with expertise in equity comp presented ideas and tips for year-end 2022 and year-start planning 2023:

  • John P. Barringer (CFP®), Executive Wealth Planning
  • Rebecca Conner (CPA, CFP®), Founder, SeedSafe Financial LLC
  • John Owens (CFP®, EA, ECA, CPWA®), Director of Financial Planning, Brooklyn FI

The article below summarizes some of the key points they made. The webinar in which they spoke is available on demand at the myStockOptions Webinar Channel. Meanwhile, myStockOptions.com has a comprehensive section on year-end planning, including extensive articles and FAQs. Seek guidance on your specific situation from qualified tax and financial advisors.

The Importance Of Multi-Year Planning

“When we start off with a client, we begin right away with the idea of multi-year planning,” noted webinar panelist John Barringer of Executive Wealth Planning in Denver, Colorado. “We treat every meeting with clients as if it’s year-end. There are so many overlapping issues: trading windows, new grants, vesting.”

Multi-year planning is especially valuable with stock comp, as you can control the timing of stock sales and option exercises, and you know when RSUs will vest. Getting this planning right is crucial, for example, if you are considering option exercises or stock sales at the end of 2022.

For a start, you need to be aware of the 2022 and 2023 thresholds for higher tax rates on compensation income and capital gains, the phaseouts for various tax credits, and the Medicare surtax on investment income. If you believe your tax rates will be higher in 2023 and beyond, you want to consider whether to accelerate income into 2022.

Webinar panelist Rebecca Conner, the founder of SeedSafe Financial in Austin, Texas, outlined her systematic approach to multi-year planning. “What we do for all of our clients is just lay out what we expect each year and then see what we can play with,” she explained. “If they’re receiving RSUs as well as nonqualified or incentive stock options, we’ll map out RSUs over the years and where we think taxable income is going to be. Then we’ll see how we can pop other things around and fit them in over those next few years.”

Stock Option Exercises: Variables To Consider

As Rebecca acknowledged, the vesting dates of RSUs are fixed, so you can’t control when you receive RSU income at vesting. By contrast, you choose when to exercise stock options, making them a variable to play with in multi-year planning.

Example: You are a joint filer with $290,000 of taxable income in 2022 and projected taxable income of roughly the same in 2023, putting you in the 24% tax bracket. You also have a $100,000 spread on your nonqualified stock options (the grant will expire in March 2023). By exercising just enough options in 2022 to generate $50,000 of additional income (giving you $340,000 for the year), you can then exercise the remaining options in early 2023 and avoid the higher 32% tax bracket in both years.

However, many advisors emphasize that taxes should not be your only consideration in year-end planning. “At year-end, we don’t let the tax tail wag the dog,” cautioned Rebecca. “The main question is really how much cash are you willing to lose toward options? They’re never a guarantee. It’s important to recognize that this may be a moonshot. If we can treat it like a very small company stock with high volatility, what would you want to put toward that? We’ll recognize what our clients would like from that perspective.”

Other factors in planning for stock option exercises at year-end are holding periods for capital gains and your company’s stock-trading windows, as discussed by webinar panelist John Owens, Director of Financial Planning at Brooklyn FI in New York. “One of the things that’s top of mind is going through what the timeline looks like,” he said. “If you’re doing an exercise on, say, December 8, you might not be able to sell those shares for long-term capital gains next year because your company’s trading window is closed during that time. We need to understand cash-flow needs for clients and how long they actually want to hold the stock.”

Incentive Stock Options: Year-End Dilemma

The advisors emphasized that in a down market it is crucial to review incentive stock option (ISO) exercises that you made earlier in the year if you are still holding the stock. Selling that ISO stock before the year ends removes the spread at exercise from the AMT calculation, thus eliminating the need to pay the AMT on it. However, making that move also means you don’t meet the ISO holding periods for beneficial tax treatment.

Diversification In Down And Volatile Markets

The need to diversify is a common theme in all investment planning. Do the down markets and volatility of 2022 make that need more or less urgent at year-end?

“I think it really depends on what the client is anchoring to,” offered John Owens. “If they’re anchoring to a stock price that was 80% higher a year ago, it may be hard to get them to sell. But I try to spin it by saying hey, your company’s stock may be down but the broader stock market is also down, so you’re selling something at a discount to buy something at a discount. You’re still getting upside, and it’s a more diversified upside.”

The webinar panelists all said they generally recommend that clients sell RSU shares at vesting as a way to diversify out of company stock. “With our clients, we explain that diversification is something we’re going to recommend in every trading window,” asserted Rebecca Conner. “For RSUs that are vesting and available to sell immediately, we will do that from the get-go. And we’ll have that conversation during the good years as well as the bad years. It’s part of the process. Clients understand that they’re dollar-cost-averaging over a period of time.”

To those who are skeptical about this concept, she points out that loyalties to single stocks can be dangerous allies. For example, after an initial public offering (IPO), “statistically 70% of IPO companies do not get back to their initial high price,” an observation that may help to ease the client away from anchoring on that price.

Private Companies In 2022: Delayed IPOs

John Owens noted the special relevance of multi-year planning in 2022 for employees of private companies which were expecting an IPO this year that was postponed by a year or more due to economic uncertainty or other factors.

“Many clients have had delayed liquidity events this year because the IPO market has dried up,” he explained. “For clients who we now know are going to have huge liquidity events in future years, we’ve actually been looking at accelerating income into this year because their income is lower than we thought it was going to be.” This strategy, he observed, takes advantage of the client’s lower tax rate this year for any income that can be recognized now instead of later, when the rate will be higher at the time of the company’s IPO, acquisition, or other liquidity event.

Ways To Reduce Taxable Income At Year-End

What if you did have a big income spike from stock compensation this year? What are some of the ways in which you can reduce your income on other fronts to keep your 2022 income in a lower tax bracket?

John Barringer mentioned first the need to max out 401(k) plans and, beyond that, perhaps consider a contribution to a nonqualified deferred compensation plan. However, he cautioned, this type of planning should be prospective rather than retrospective. “Before that big income hit happens, we need to know how we’re going to proceed,” he urged. “By the time the event happens, if there wasn’t some planning before, it’s getting close to being too late.”

Rebecca Conner agreed. “A client will come to us with a double-trigger RSU vesting and say ‘How do I minimize taxes?’ Oh, man!” she laughed. “Not very easily. However, we can talk about ways to defer future taxes. Maybe it’s a great time to do a mega-contribution to a 529 college-savings plan for a young child. Maybe it’s time to make choices with investments now to really set you up to defer those kinds of taxes in a bigger picture over multiple years in the future.”

Tax-Loss Harvesting

One popular year-end strategy is tax-loss harvesting: you sell stock at a capital loss that can then be used on your tax return to first offset capital gains and then up to $3,000 of ordinary income. “We’re focusing a lot on tax-loss harvesting, mainly for people with huge first-time capital gains, perhaps $2–3 million payouts,” said John Owens. Rebecca Conner added that her firm is doing the same. “We look at how much a tax loss can really help clients and what we think is justifiable,” she explained. “It may help them for a lot of additional stock sales.”

But not all advisors are big fans of this technique. “I do not oversell the idea of tax-loss harvesting,” said John Barringer. “It’s not going to make a huge difference on your tax return. It’s going to lock in losses that you may or may not regret later. And there’s not a lot of bang for your buck in focusing on this when there are so many other issues to focus on with equity comp.”

If you do seek tax-loss harvesting and plan to repurchase the same stock after selling it at a loss, beware of the rules on wash sales, which are explained in an article at myStockOptions: 7 Wash Sale Facts To Know Before Selling Stock For Tax Loss Harvesting.

Year-Start Planning In 2023

Part of year-end planning is also thinking about the coming year. “What new grants do you expect in 2023?” asks John Barringer of his clients. “An ongoing down market may mean a bigger share grant or at least a lower exercise price for stock options.” You should also be aware of stock option grants that are scheduled to expire in 2023, he added, along with what would happen to stock options and RSUs if you were laid off.

John Owens pointed out that now is a great time to enroll in an employee stock purchase plan (ESPP), especially if it has “a good lookback provision for calculating the purchase price.” ESPPs with that feature can be a surprisingly profitable deal in a down market.

Rebecca Conner urges clients to think about employment prospects. “Review job expectations and career goals. If you’re making a move in 2023, consider your total expected income and the impact of any stock options that you may need to exercise when you leave your current job for a new one.”

She and the other panelists also recommend evaluating whether to exercise ISOs early in the new year and hold the shares if the company’s stock price is still depressed but the outlook for the company is good. This can minimize your AMT risk while starting the holding-period clock for the beneficial ISO tax treatment.


Shutterstock_1233219622myStockOptions Webinars

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, CEP, EA (live webinars only), and CPE (live webinars only):

Year-End 2022 Financial & Tax Planning For Equity Comp. Boost your knowledge of year-end and year-start strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp. Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp. It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors. Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition. Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

"The knowledge I gained from myStockOptions both as a premium member and from your webinars has made me stand out at work." —Vincent Leonardo (EA), Tax Analyst, Intuit

Negotiating Equity Compensation: How Advisors Can Help Clients. Learn the best ways to evaluate and negotiate equity compensation in job offers and how to protect it at job termination.

Strategies For Concentrated Positions In Company Stock. Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know. Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.

Preventing Tax-Return Errors With Stock Comp And Stock Sales. Understand the rules of tax-return reporting for stock options, restricted stock/RSUs, ESPPs, and sales of company shares. Learn how to avoid the common mistakes that can lead to overpaying taxes or unwanted IRS attention.


Selling Stock At Year-End To Harvest Losses? Don't Get Tangled In The 'Wash Sale' Rule

this little piggy got tangled up

“Harvesting” capital losses to offset capital gains on your tax return is a popular year-end strategy. But watch out for wash sales, which can tangle up your tax planning. This article explains what you need to know to avoid this tax trap.

Tax-Loss Harvesting And Wash Sales

In brief, the tax rules let you net capital losses against capital gains on Schedule D of your Form 1040 tax return. Any unused capital losses you can then net against up to $3,000 of ordinary income. Lastly, you can then carry forward any remaining losses to the next tax year. If you think stocks will go up in 2023, you may think it makes tax sense to sell loss-makers now, before the end of 2022, and repurchase those stocks soon afterward to keep your investment in them.

For example, after the stock market declines of 2022, you may now hold securities—whether stocks, ETFs, or mutual funds—that would generate capital losses if sold. Those losses could then be used to offset capital gains and a limited amount of ordinary income.

Here’s where that crafty tax plan runs into trouble. A sale of stock at a loss coupled with the repurchase of the same stock within 30 calendar days after the sale will trigger the wash-sale rules, disallowing, for now, the capital loss. Below are key facts to understand about these rules.

Seven Points To Know About Wash Sales

1. The disallowed loss is not “lost” (with one big exception: see #4 below). Instead, the loss you’re not able to claim on your upcoming Form 1040 tax return is added to the replacement stock’s basis and holding period. If you purchase fewer shares than you sold, the wash-sale treatment applies only to that number of shares (i.e. not the entire number of shares initially sold).

2. While the timeframe for wash sales is often presented as a 30-day window, it’s actually a 61-day window covering the 30 days before and after your sale, regardless of whether that period spans two years. Buying in early January the same stock you sold at a loss at the end of December would definitely be deemed a wash sale.

3. The rules are triggered when you buy “substantially identical securities” before or after the loss. Let’s say you’re selling at a loss the stock in the company you work for but believe strongly that its price will rebound. You’re stuck with the wash-sale time limits once you sell it, and you also need to follow the insider-trading rules even before you do. You could instead buy the stock of another company in the same industry or in a mutual fund or ETF tracking that industry.

4. The wash-sale rules do not directly apply when the sale and purchase both occur in your 401(k) or IRA, as capital gains and losses are not tracked in those accounts. However, after the sale in your retail brokerage account, you cannot outfox the IRS by instead purchasing the same security in your IRA or 401(k). IRS Revenue Ruling 2008-5 goes even further: it prevents you from adding this loss to the basis of the shares purchased in your IRA. That would permanently eliminate the capital loss disallowed in the year of sale.

5. Trades involving listed options, employee stock option exercises, and shares bought through employee stock purchase plans (ESPP) or dividend reinvestment plans (DRIPs) can cause a wash sale when they occur within 30 days after you sell the stock at a loss. The treatment for incentive stock options (ISOs) is more draconian still, as a wash-sale loss is triggered even when you sell the ISO stock at a price higher than the exercise price but lower than the market price on the date of exercise. For restricted stock or restricted stock units, the grant itself or its vesting may also trigger the wash-sale rules when you have sold stock at a loss, as explained by an FAQ at myStockOptions.com.

6. Your brokerage firm will track and report wash sales by account. It may not do this across different accounts that you (and your spouse) have at the firm and at other brokers. Therefore, you and/or your tax-return preparer must consider trading activity in securities across all the accounts you have.

7. Form 1099-B, which you receive from your broker in time for tax season (usually by Feb. 15), reports all of your stock sales from the prior year. It shows (in Box 1g) the amount of any nondeductible loss stemming from a wash sale involving covered securities (at least for those in the same account). Note that many brokerage firms reformat Form 1099-B into their own substitute statement that has columns labeled the same as the boxes on the IRS form. You still need to report the wash sale on your tax return on Form 8949, even though the loss on those shares will not be immediately recognized, and adjust the tax basis on the replacement shares when you sell them.

More Tax Resources

See IRS Publication 550 for the IRS guidance on wash sales. It appears in the subsection “Capital Gains & Losses” of Chapter 4 (pages 56–57 in the version for 2021 tax returns).

When your tax planning (and your tax return) for 2022 involves income from company stock sales and/or equity compensation, such as stock options, restricted stock units, or ESPPs, explore the Tax Center at myStockOptions.com and consult a qualified tax or financial advisor. We have articles, FAQs, videos, and annotated IRS forms that demystify the complex federal tax rules. On December 1, myStockOptions.com is also holding a webinar on year-end and year-start financial planning and tax strategies for equity comp (see section below).


Year-end piggybank

WEBINAR: Year-End 2022 Financial & Tax Planning For Equity Comp

Thursday, December 1, 2022
2:00pm to 3:40pm ET (11:00am to 12:40pm PT)
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, and CEP

In this lively webinar, boost your knowledge of year-end and year-start strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes. Volatile markets and economic uncertainty make the need for effective guidance even more important, as this webinar will cover.

In 100 minutes, the webinar features insights from a panel of three leading financial and tax advisors, including real-world case studies, to provide practical expertise on equity comp in both public and private companies. Minimize taxes and build wealth with their know-how on the essentials of year-end and year-start planning.

Time/date conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the detailed presentation slide deck and handouts.

Agenda and panelist details are available at the webinar registration page.

"The knowledge I gained from myStockOptions, both as a premium member and from your webinars, has made me stand out at work." Vincent Leonardo (EA), Tax Analyst, Intuit


Stock Options & RSUs: 6 Pro Tips For Navigating Volatility

For many of you who have equity comp, the extreme market fluctuations of 2020–2022 may be your first experience of volatility after a decade of rising markets. Know that it's normal to feel a little rattled. Sudden stock-price declines can stress out even the most experienced holders of stock comp (and their financial advisors).

Sooner or later, volatility may force you to make decisions that affect your financial future and long-term wealth. Should you change your financial plan or stick with it?

Financial strategies for equity compensation amid volatility and falling stock prices were dominant themes in two recent myStockOptions webinars. In one webinar on stock option exercise strategies and another on planning for restricted stock and RSUs, panels of financial advisors and tax experts discussed how to navigate volatility and down markets. This diverse group, including CFPs, EAs, and JDs, presented a variety of insights from different angles.

1. Listen To Your Risk Tolerance

David Marsh, a financial-planning case manager at Ameriprise (Minneapolis), pointed out in the stock option webinar that market declines offer a useful period to “confirm or reset risk tolerance.” In good times for your company’s stock price, he observed, it’s easy to be aggressive and bullish in your financial strategy. It’s harder to keep up that resolve when the stock price tumbles. In fact, he continued, a falling stock price can give you a helpful reality check on your tolerance for investment risk.

He suggests you listen to what your emotions in a downturn are telling you. “How much of a downturn are you willing and able to stomach, and how does that impact your goals? If you’ve been relying on equity comp to meet regular living expenses, that’s a real danger zone which comes to light in stock-price volatility and downturns.” Insights you derive from dark times for the stock price can help you re-examine your goals for share proceeds and re-assess the portion of them that is discretionary.

With nonqualified stock options, he went on, a reduction in the difference between the stock price and the exercise price may seem to create a tempting opportunity to exercise the options. That starts the holding period for the beneficial tax treatment on long-term capital gains at sale when the stock price eventually recovers. This is a common strategy for incentive stock options (ISOs).

However, with nonqualified stock options (NQSOs) there may be better uses for the same money. “You should compare whether to exercise and hold NQSOs or maybe just hold on to that option and put the cash to work in another way,” he advised. “Consider investment risk and tax factors. What I would bear in mind is that if you’re game enough to exercise NQSOs at this time, I would say let’s take that cash and simply buy more shares. If indeed the stock price does recover, by increasing the equity position in the company we may produce a better result.”

2. Welcome New Option Grants, But Have A Layoff Plan

Megan Gorman, the founder of Chequers Financial Management (San Francisco), complemented David’s thoughts in the stock option webinar with the fact that a depressed stock price is an excellent time to get new stock option grants. Playing a long game, she emphasized, is key to success with equity compensation. “If you go back to March 2009, when the stock market was miserable, it was an amazing time to get a grant with a very low exercise price,” she observed. The stock-price increases during the long recovery made option grants awarded at that time extremely wealth-generating.

But beware of layoffs, she cautioned. Option grants have finite terms and typically only very short periods when options can be exercised after job termination. “It’s important to have a strategy for exercising options and selling stock in the event you are laid off. In these more volatile markets, think about the fact that you are at risk of losing your job. Don’t lose the equity awards you worked so hard for.”

3. Don’t Forget The Big Picture, But Revisit Your Cash Position

Keep your big-picture financial goals in mind, advised Chloé Moore, the founder of Financial Staples (Atlanta), in the restricted stock/RSU webinar. “Things are a little volatile now, but keep a handle on your financial goals. Focus on what you can control: continue to build savings, pay off debt, and put yourself in a stronger financial position to shield yourself as much as you can from the impact of volatile markets.”

To that end, now is a good time to increase your cash position, she noted. “Your restricted stock units can help with this,” she points out. “That’s a good reason to sell the shares as soon as the stock vests.” If you’re using your RSUs to fund your lifestyle, it’s crucial “to revisit cash flow,” she asserted.

4. Try To Be Logical Rather Than Emotional

This is often easier said than done, but it’s an attitude worth reinforcing. In the RSU webinar, Meg Bartelt, the founder of Flow Financial Planning (Bellingham, Washington), addressed the irrational tendency to place too much importance on the grant price of restricted stock/RSUs. If the stock price falls between grant and vesting, this mental “anchoring” makes it easy to feel as if you’ve lost something.

“If you received Google RSUs a year ago, the much higher grant value is really depressing now,” she mentioned as an example. “Your projected comp used to be $500,000. Now it’s $300,000. But it’s important to remember that the $500,000 was literally never yours. The only thing that is yours is the number of shares, if you stick around long enough at the company. Be aware of that bias.”

Should you hold your RSU shares or sell them? The test for answering this question, Meg pointed out, “doesn’t change with the stock price.” Rather, she went on, it’s always this: “If you had cash of the same amount, would you buy stock in the same company?” If the answer is yes, you probably want to hold your shares. If the answer is no, you probably want to sell them. “The answer may change with the stock price and market conditions, but not the logical framework,” she emphasized.

Daniel Zajac, the managing partner of Zajac Group (Exton, Pennsylvania), brought up an alternative approach to minimize downside risk in volatile markets if you have both stock options and RSUs. Speaking alongside Meg and Chloé in the RSU webinar, he suggested doing an analysis to determine whether it makes sense for you to hold your vested RSU shares and instead exercise your options and sell those shares. That can safeguard the generation of proceeds you need for specific goals.

5. Watch Your Estimated Taxes; Look Ahead To Future Grants

Meg also observed that a big drop in income between last year and this year means that if you pay estimated tax to keep up with income spikes from RSU vestings, you should revisit how much estimated tax you’re paying. “Estimated tax vouchers for the current tax year are based on last year’s income. If you use last year’s estimated tax vouchers for this year’s lower income, you’re going to be way overpaying estimated taxes this year.”

The inverse is also true, she continued, should you lower your estimated tax payments this year. If the stock price goes back up next year, you want to be sure you’re not underpaying estimated taxes on the basis of your lower income this year.

Daniel echoed Meg’s observations by stressing the importance of “actively working with a CPA” to be sure that you’re neither overpaying nor underpaying estimated tax throughout the year, instead of simply relying on the safe harbors based on your prior year’s income. “If you have significant equity comp,” he stated, “you should be doing quarterly check-ins for estimated taxes.”

Daniel and the other presenters in the RSU webinar also pointed out that a fallen stock price presents new opportunities. If your annual equity comp grants are based on a percentage of your salary, “you may be getting additional shares because the stock price is lower.” This is good news to offset the bad news of a lower stock price.

6. Now Is The Time To Seek Professional Financial Advice

Bill Dillhoefer, the CEO of Net Worth Strategies (Bend, Oregon), which developed the StockOpter analysis tool, urges employees with equity comp in a downturn to seek advice from a professional financial planner, if they haven’t already. “When the stock price is going up, you may be getting advice from the watercooler chat and think you don’t need a financial advisor,” he said in the stock option webinar. Confidence is easy in bull markets. However, the game changes when stock prices tank and a bear market looms.

Bill emphasized how much a financial advisor can help you make better decisions and avoid mistakes with stock compensation. A good advisor can “establish and track diversification criteria based on risk.” He recommended understanding your “forfeit value,” a metric an advisor can calculate that shows the value lost if you leave your company to work for a competitor. Even if you’re generally confident in your knowledge of personal finance, advisors can help you “be a little more secure about lasting through these volatile markets without going crazy.”

Further Resources

The webinars in which these financial-planning experts spoke are available on demand at the myStockOptions Webinar Channel:

myStockOptions.com has other resources and tools on financial planning amid volatility and down markets.


Year-End Planning 2021: 6 Items For Your Stock Comp Checklist

Year-end-stock-photo

Year-end financial and tax planning comes around every December like old favorite holiday movies. Strategies for year-end 2021 and year-start 2022 are especially crucial for the millions of employees in the United States who have stock compensation such as stock options and restricted stock units (RSUs), participate in an employee stock purchase plan (ESPP), and/or have holdings of company shares.

To help keep the season merry and bright, myStockOptions.com recently held a webinar on year-end planning with a panel of three financial and tax advisors who have expertise in stock compensation. Some of their insights are summarized in the year-end checklist below.

1. Should You Plan For Tax-Law Changes By Congress?

The future of new tax legislation in Congress is not clear enough to provide definite direction for year-end planning, according to the webinar panelists. The version of the Build Back Better Act passed by the House of Representatives in November did not include some of the tax hikes previously on the table to raise ordinary income and capital gains rates and change the estate and gift tax.

But it does include other tax provisions to keep an eye on that could impact equity compensation or stock sales. For example, it seeks to allow SALT (property and state tax) itemized deductions up to $80,000 (currently limited to $10,000). This change would affect tax planning when you have incentive stock options (ISOs) and want to avoid the alternative minimum tax.

Another major proposal in the bill is a surtax of up to 8% on the very wealthy. For individuals, this provision would impose a surcharge of 5% for modified adjusted gross income (MAGI) of more than $10 million, plus an additional 3% on MAGI over $25 million. This creates the equivalent of a top long-term capital gains rate of 28.8% or 31.8% that would apply to stock sales.

The bill also seeks to limit the qualified small business stock (QSBS) income exclusion to 50% for sales after September 13, 2021, for individuals with adjusted gross income of at least $400,000 and for all trusts and estates. This is a special tax benefit when you have stock compensation, founder’s stock, or investments in a private company and have held the shares at least five years, plus meet other requirements. The QSBS exclusion has been 100% for QSBS up to $10 million over the past several years.

“If this goes through, it’s basically going to negate any benefits of qualified small business stock,” lamented webinar panelist Chun Wong, Managing Partner of the CPA and accounting firm Safe Harbor LLP in San Francisco. He explained that a 50% exclusion would raise problems with the alternative minimum tax (AMT), depending on when the stock was acquired.

However, the future of the bill is too uncertain to be a factor in year-end tax planning. “The legislation currently in Congress is out of your control,” asserted Ally-Jane (AJ) Ayers, a CFP, CEP, and Enrolled Agent who co-founded the financial-planning firm Brooklyn FI in New York. “There’s so much we don’t know that at this point in the year, the best you can do is make a goals-based decision or a risk-based decision. We shouldn’t make tax decisions about what may or may not happen in Congress this year. The best thing to do is to make decisions about what your family needs for liquidity and financial independence.”

2. Income-Shifting And Multi-Year Planning

Multi-year planning is especially valuable with equity compensation, given the spikes of income that can occur with option exercises, the vesting of restricted stock/RSUs, or company stock sales. In general, you want to keep your yearly income under the thresholds for higher taxes and try to recognize extra income in the year when your income and tax rates will be lower.

Be aware of the 2021 and 2022 thresholds for higher tax rates on compensation income and capital gains, the phaseouts for various tax credits, and the Medicare surtax on investment income. The table below presents key income thresholds in 2021 that affect your tax rates.

TAX RATE/IMPACT INCOME THRESHOLD
Income taxed at 37% (single) over $523,600
(joint) over $628,300
(taxable income)
Other upper income tax rates for compensation income
and short-term capital gains (22%, 24%, 32%, 35%)
Single: taxable income starting at
$40,526 (22%)
$86,376 (24%)
$164,926 (32%)
$209,426 (35%)

Joint: taxable income starting at
$81,051 (22%)
$172,751 (24%)
$329,851 (32%)
$418,851 (35%)
Capital gains (long-term) and dividends (qualified) taxed at 15% or 20% 15% rate when taxable income:
(single) $40,401 through $445,850
(joint) $80,801 through $501,600

20% rate when taxable income:
(single) over $445,850
(joint) over $501,600
3.8% Medicare surtax on investment income;
additional 0.9% Medicare tax on compensation income
$200,000 single
$250,000 joint
(modified adjusted gross income)

“The primary place where I see multi-year planning in my practice is for employees who have ownership guidelines as part of their employment contract and use RSU vestings and other ways to acquire the stock to meet them,” observed webinar panelist John Barringer, a CFP and the Managing Partner of Executive Wealth Planning in Denver. “Spreading out stock option exercises over a number of years to increase their stock ownership can smooth out the tax consequences.”

“Where we see multi-year planning the most is for clients who are going to make a big life change,” said AJ Ayers of Brooklyn FI. “For example, if they’re planning to switch jobs or add/remove a spouse from the tax return, those are opportunities for very large income swings. If we have a CMO at a company that just went public making $350,000 a year and they want to take a sabbatical next year, perhaps we can shift NQSO exercises into next year when we are nearly certain their tax rate will be lower.”

However, the advisors warn against making taxes the only reason for taking year-end action on stock comp. “I have to remind clients year after year to not let tax considerations be the primary driver of exercise timing,” explained John Barringer. “That being said, when you have options that are deep in the money or close to expiration, if you squeeze out a little bit of exercise now and still stay in the same tax bracket, that’s probably a good plan. If you run the risk of exercising in the next year, bear in mind that the differential in tax brackets could easily be erased by a couple of bad weeks of market behavior. Down markets don’t care about your tax treatment.”

“I would put need to diversify first,” added AJ Ayers. “As opposed to what the client thinks the stock is going to do, we ask what are the client’s goals? How quickly do they want to reach financial independence or retirement, and how does that impact our multi-year strategy to diversify?”

3. Withholding May Not Cover Taxes Owed

The flat supplemental wage rate for federal income tax withholding on stock compensation is based on the seven federal income-tax brackets. For amounts over $1 million, it is linked to the highest rate (37%). For amounts up to $1 million, it is linked to the third rate (22%), which is relatively low for most people with equity comp. Often those employees are underwithheld.

In fact, the 22% rate of withholding typically does not cover the actual taxes you will owe on the additional taxable income from your exercise of nonqualified stock options or vesting of restricted stock/RSUs. You must therefore know the tax bracket for your total income and assess the need to (1) put money aside to cover the taxes, (2) pay estimated taxes, or (3) revise your W-4 for the remainder of the year to increase salary withholding. Plus, with ISOs, while you have no withholding at exercise or sale, you will still owe taxes for the income triggered.

“My favorite way to handle this would be to just make changes in the W-4 and withhold extra every other paycheck,” said AJ Ayers. “Unfortunately, with the size of RSU vests, typically that’s not possible. They would have to withhold their entire paycheck and then some. So we find that making quarterly estimated tax payments is the best way to handle this.”

“We set our clients up with protective estimates,” noted Chun Wong. “If there is an event where the client has to pay more, such as at the end of the year, we’ll make an adjustment on what has to be paid on an estimate or W-2 withholding.”

4. Incentive Stock Options

Thinking about exercising incentive stock options (ISOs) before the end of the year and then holding the stock? While you must hold ISO shares for more than one year from exercise and two years from grant to get their beneficial tax treatment, you need to understand that the ISO exercise-and-hold beyond the year of exercise can also expose you to the alternative minimum tax (AMT). If the stock price falls significantly, you could be stuck with a big AMT bill on paper gains that is greater than the actual total value of the shares.

Be sure that you and your tax advisor first prepare an AMT projection to determine your AMT crossover point and see whether a tax benefit may arise from waiting until January of the following year. Next year the exercise may not trigger the AMT. Exercising ISOs at year-start can be a wiser move anyway. You then have all year to see how the stock performs and decide whether to hold the ISO shares beyond the year of exercise or sell before year-end to avoid the AMT in what is called a disqualifying disposition.

“We often will disqualify some ISOs to provide liquidity,” explained AJ Ayers. “As we disqualify ISOs, we bring up ordinary income. That creates a bigger budget to exercise additional ISOs and not generate any more AMT in the future.”

5. Year-End Planning For Pre-IPO And IPO Companies

Special year-end considerations arise for employees with stock comp at newly public companies or those announcing an upcoming IPO. You need to know:

  • when the post-IPO lockup or other stock resale restrictions will end
  • whether you have any ability to sell some shares sooner
  • when shares will be delivered with double-trigger vesting RSUs

“One of the first things I tell my clients is to find out who the stock plan administrator is,” said AJ Ayers. “For clients who are experiencing an IPO, a direct listing, or a SPAC, having a direct line to someone who actually knows what’s going on will be the most valuable thing. Often companies are just not prepared to give these answers.”

AJ went on to offer some key points for clients at private companies who are expecting the company to go public soon.

  • Be wary of companies going public in Q4 of the current tax year. If you have an RSU grant, it may start vesting and will therefore increase ordinary income.
  • If you are going to be subject to blackout periods when the company prohibits sales to prevent insider trading, you may want to break the general wisdom of not exercising ISOs late in the year so you can start the one-year holding clock for a 2022 qualifying disposition and attempt to catch the Q4 trading window.
  • Be prepared to run a few different tax-planning scenarios to show how disqualifying ISOs can lead to a favorable outcome if you are in danger of paying a large amount of AMT.
  • The year before an IPO can be a fantastic opportunity for charitable donations, especially if you made ISO disqualifying dispositions that bump up your income.

6. Confirm Dates For Exercise And Vesting: 2021 Or 2022?

This last point here may seem little, but it can have big implications. Stock option income recognized on an exercise date in 2021, and restricted stock/RSU income with a vesting date in 2021, will be included in 2021 taxable income and on your W-2 for 2021. It does not matter that the company won’t send the taxes to the IRS until early January.

However, January 1 of 2022 falls on a Saturday, meaning that for many companies December 31 (i.e. Friday) is a holiday. Therefore, you will want to confirm how your company handles exercises that occur on or vestings scheduled for December 31, 2021. Will the transaction revert to the previous business day or the next business day? You also want to confirm whether December 30 (Thursday) or December 31 (Friday) is considered by your company and your stock plan to be the last business day of 2021 (and if it’s Dec. 31 whether up to a certain time).

Further Resources

The year-end planning section on myStockOptions.com also has articles by experts and FAQs on these topics and more. The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. In addition to what’s covered in this article, the advisors presented case studies highlighting many of the planning issues they focus on at year-end for public and private company clients.

myStockOptions Webinar Channel

BootcampSee the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each on-demand webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP:

Year-End 2021 Financial Planning For Equity Comp: Sharpen your knowledge of year-end and year-beginning financial and tax strategies for stock comp and company shares with insights from a panel of three leading financial advisors, including real-world case studies, to provide practical info, guidance, and expertise for equity comp in both public and private companies.

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition: Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp: Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp: It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors: Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Strategies For Concentrated Positions In Company Stock: Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know: Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.