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

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

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)
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.

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.

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

After 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.

myStockOptions 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

“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).

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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

Nonqualified Deferred Comp: IRS 2023 Qualified Plan Limits Affect Year-End Deferral Decisions

For many participants in nonqualified deferred compensation (NQDC) plans, November and December are the time to be like an autumn squirrel and decide how much of next year’s salary to defer and store for the future. This decision about nonqualified plans is heavily influenced by the IRS contribution limits for qualified retirement plans. The IRS just set the qualified plan limits for 2023.

Those yearly contribution limits for qualified retirement plans are a big reason why companies offer nonqualified plans: to let executives and other highly compensated employees put away extra amounts for retirement with an elective nonqualified plan or an excess 401(k) plan. NQDC allows you to put away amounts of money beyond the permissible contribution amounts of standard qualified retirement plans.

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) plans. For retirement planning, NQDC 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.

The complex rules under Section 409A of the US tax code must be followed in the deferral and distribution elections. The amount that you defer can only be informally funded by your company and is at risk should the company enter bankruptcy proceedings. Our sibling 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.

How 2023 IRS Qualified Plan Limits Affect NQDC Deferrals

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). Therefore, the contribution limits set by the IRS on qualified plans, adjusted annually for inflation, are important for NQDC planning:

Contribution type/limit	2022	2023
Compensation allowed in qualified deferral and match calculation	$305,000	$330,000
Elective comp deferrals	$20,500	$22,500
Catchup contributions for people 50+	$6,500	$7,500
Total defined contribution limits (employee and employer contributions)	$61,000 + catchup contribution	$66,000 + catchup contribution
Defined benefit plan payout limits	$245,000	$265,000
Income threshold defining key employees for top-heavy plans and six-month delay on payout upon separation	$200,000	$215,000
Income threshold defining highly compensated employees for the purposes of nondiscrimination testing	$135,000	$150,000

Given the current inflation, the IRS changes in limits from 2022 to 2023 are much larger than they have been in recent years. However, if you’ve already maxed out your qualified plan contributions for 2022, you will still probably do the same in 2023, so you will need NQDC plans to defer any salary and bonus increases you expect in 2023. Also, if you believe tax increases are on the way and will affect you, you may feel a growing need to defer income.

Set by the Social Security Administration, the Social Security wage cap will rise in 2023 to $160,200, up from $147,000 in 2022. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $9,114 in 2022 and will rise to $9,932.40 in 2023. Social Security tax (up to the yearly limit) and Medicare tax (uncapped) are withheld at the time of deferral.

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

myStockOptions 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):

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.

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

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

See 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.

Year-End Donations Of Stock: 7 Ways To Make The Most Of Your Charitable Giving & Tax Deduction

Despite the worsening pandemic and widespread economic uncertainty, the stock market is hitting new highs. For the financially fortunate among us, there has never been a better time to support the less fortunate.

Donating stock instead of cash to charities and other nonprofit organizations can not only provide crucial assistance for them but also boost the tax deduction you receive for your generosity. This is true whether you have greatly appreciated shares acquired long ago in one of the most valuable stocks of 2020 (e.g. Amazon, Apple, Etsy, FedEx); stock from being an early-stage investor in an upcoming hot IPO company (Airbnb, DoorDash); or company shares acquired from the exercise of stock options, the vesting of restricted stock/RSUs, or an employee stock purchase plan.

1. Core Tax Rules For Stock Donations

After you have held stock for more than one year and its price has risen, at the time of the donation you get a tax deduction equal to the fair market value of the stock (i.e. not your lower purchase price, technically known as the cost basis). For stock not held for one year, the deduction is the cost basis or the current fair market value, whichever is lower.

If the sale of the appreciated shares would have triggered long-term capital gains, your deduction is up to 30% of your adjusted gross income (20% for family foundations), and you can carry forward higher amounts for five years. When the sale of the shares would have produced ordinary income or short-term capital gain, the deduction is limited to 50% of your adjusted gross income (30% for family foundations) with five-year carry-forwards. Shares gifted to donor-advised funds receive the same tax treatment.

2. How Stock Donations Are Valued For Tax Deductions

For public companies with an active market in their stock, the fair market value for the donation is the average between the high and the low stock selling prices on the delivery date. For the stock of pre-IPO companies, you need a valuation by appraisal or some other reasonable valuation method. You, with your tax and financial advisors, want to review various sources, including IRS Revenue Ruling 59-60. It lists valuation factors and explains that no general formula fits all private-company situations.

3. Donation With Stock Can Be Bigger Than With Cash

With a charitable gift of appreciated securities held long-term, the donation you make and the deduction you get are greater than they would be if you were to sell the shares and donate the cash proceeds instead. That is because when you donate shares, you avoid paying the capital gains tax.

Donation Example

Suppose you can either (1) donate $50,000 in stock held more than one year or (2) sell the stock first and donate the proceeds. The stock has a cost basis of $10,000. You have a 40% combined federal and state tax rate on your income and a combined 20% tax rate on capital gains.

4. Company Stock Can Help Bunch Donations

The advice from many experts is to bunch donations so that your itemized deductions go beyond the Tax Cuts & Jobs Act standard deduction amounts in 2020 of $12,400 for individuals and $24,800 for joint filers (adjusted annually for inflation). If you do not routinely exceed the standard deduction, you can get over it by bunching in a given year donations of stock to charities or a donor-advised fund.

Alert: The CARES Act, adopted in response to the Covid-19 pandemic and related economic crisis, does have provisions on charitable contributions, but they do not involve stock donations. Taxpayers who use the standard deductions instead of itemizing deductions can claim up to a $300 deduction for a cash donation to a charity directly off adjusted gross income (i.e. an “above the line” deduction on Line 10b of the IRS draft 2020 Form 1040). For the 2020 tax year, the legislation also increases the deduction percentage limitation for cash charitable contributions (not stock) from 60% to 100% of adjusted gross income.

5. Extra Time May Be Needed To Process Stock Donations

To obtain a deduction for the current tax year, the stock transfer must be completed by December 31. For electronic transfers from your brokerage account, the donation is recorded on the day it is received (not when you approve the transfer). Plan your year-end stock gifts as early as possible, know the process the charity or nonprofit requires, and have ongoing communications with your broker to ensure that the transfer takes place.

If you have valuable stock in a pre-IPO company, you will want to start the process especially early. Donations and transfers of stock in a private company can take longer than those for stock in public companies and can raise valuation issues.

Donating appreciated stock can be easier through tools like Cocatalyst. Developed with financial advisors, donors, and charities in mind, Cocatalyst has each donor fill out a secure webform and then automatically processes the stock donation with their brokerage firm. Charities of all sizes can use the Cocatalyst system to process their stock donations from donors and receive ACH or check transfers. The company explained to me that the tool is similar to a pass-through donor advised fund (DAF), but focused on directly donating stock, which offers more tax flexibility while retaining the benefits of a DAF.

Alex Chung is the founder of Cocatalyst and a current member of its board. “We wanted to enable every donor to be able to give in a tax effective way without the headache,” he told us in response to our request for comment. “Maximizing donations through stock donations and other tax strategies is important because it helps charities get every last dollar.”

Alex started Cocatalyst because he wanted to streamline his family office's philanthropic giving, but he ultimately decided to make the tool available to all. According to Cocatalyst Research, there are over $21 billion in stock donations per year, and that figure is growing at 62% annually. He pointed out to us that philanthropists such as Jack Dorsey (Twitter) and Phil Knight (Nike) have made large contributions using stock in the past year.

6. Must File Special IRS Form

With your tax return, you need to report the stock donation on IRS Form 8283, used for your noncash charitable contribution. The instructions for the form and IRS Publication 561 explain the rules that apply when you must obtain and include a written appraisal. For example, with private-company stock valued at $10,000 or less, a qualified appraisal is not needed (it is for higher amounts), but the charity needs to explain how it determined the valuation. For a donation of publicly traded stock, you do not need an appraisal.

7. Special Issues With Stock Compensation

For a charitable donation of company stock acquired from equity compensation, the tax treatment and rules are the same as they are for donations of any stock to a qualified charity or donor-advised fund. If the donated shares were acquired from incentive stock options (ISOs) or an employee stock purchase plan (ESPP), be sure you donate the shares after you have met the related special holding periods for ISO and ESPP stock (more than two years from grant and one year from exercise/purchase). Executives and directors will also want to review the Section 16 and Rule 144 requirements before gifting or donating company stock.

More Ideas For Financial Planning With Stock

For other ideas on year-end financial and tax planning for company shares, see the year-end articles and FAQs at myStockOptions. The website’s section on gifts and donations has additional related content, such as on charitable remainder trusts, private foundations, and estate planning.

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Post-Election Year-End Planning: What Financial Advisors & Tax Pros Are Advising Clients About Uncertain Tax Changes

The end of the year is a key time for financial and tax planning. The standard year-end-planning strategy is to defer income into the next year and accelerate deductions into the current year. But tax planning for year-end 2020 could change now that Joe Biden has won the presidency and Democrats may gain complete control of Congress. Biden's tax plan calls for tax increases on high earners.

However, the outlook for tax increases under President Biden is very uncertain. It depends largely on which party holds the majority of the US Senate, which will not be determined until the special runoff election for both of Georgia's US Senate spots in early January, after the end of the year-end-planning season. Even if Democrats do win Senate control to go along with their majority in the House of Representatives, many experts say tax-law changes are unlikely to be a focus of Biden’s first year. In addition, you never want taxes to be the sole reason for making decisions with your equity comp and company shares. Nevertheless, some financial advisors and estate planners are still expecting higher taxes at some point under the Biden administration. What does all of this mean for year-end planning in 2020?

The Biden Tax Changes That Could Alter Year-End Planning

Among the different parts of Biden’s tax plan, these three would have an immediate impact on 2020 year-end planning:

1. The top rate of ordinary income tax would return to 39.6% from 37% for taxpayers with income over $400,000. What remains unclear is whether this income level would be different for couples (married filing jointly) and whether it’s $400,000 in adjusted gross income (i.e. before deductions) or in taxable income. If this tax hike seems likely to you in 2021 and you're concerned about higher tax rates, it would lead to accelerating income into 2020 where possible (e.g. exercise nonqualified stock options, receive cash bonuses before year end, do Roth IRA conversions).

2. Biden’s tax plan would raise the top rate of capital gains tax from 20% to 39.6% for individuals with over $1 million in yearly income. Capital gains and qualified dividends currently have a top tax rate of 20% (plus the 3.8% Medicare surtax). If this major increase in the top capital gains rate seemed likely to take effect in 2021, it could lead to capital gains harvesting before year-end to sell shares with substantial appreciation, paying tax at the lower capital gains rate, then potentially repurchasing the shares to reset the basis in them (see the FAQ on myStockOptions about this strategy).

Alert: Whenever you sell company stock, you must be careful not to commit insider trading, which is illegal. To prevent insider trading, your company may have blackout periods when you can't trade, often around the end of each calendar quarter, and window periods when you can. As part of any strategy involving stock sales, you need to know when these periods occur.

3. Biden’s tax plan would limit itemized deductions to 28% of value, with some deductions phasing out for income over $400,000. That would lead to also accelerating deductions, such as donations, into the current year for high-income taxpayers (the reverse of the usual approach when you expect higher taxes in the future) to maximize them before limits put into place. This concept is explained by financial advisor Jeffrey Levine in the Kitces.com blog.

Tax Changes Not Expected In 2021

In my review of client alerts and updates from wealth management, tax, and financial advisory firms of various sizes, I found they see little chance of taxes increasing in 2021:

• Northern Trust:  “We expect an agreement on some fiscal stimulus, while tax increases are off the table.... [T]he most likely outcome is divided government that will significantly limit policy.”
• PwC: “A Republican-controlled Senate would largely eliminate the prospect of any significant tax increases until at least after the 2022 midterm elections. If Democrats do win an operational Senate majority with the tie-breaking vote of a Vice President Harris, the outlook for action on Biden’s tax plans could be put into question because of the challenges of operating in an evenly divided Senate.”
• Grant Thornton: “While it is always possible that Democrats win both runoffs in Georgia and immediately pursue tax increases with Senate control, it would be surprising. Key Democrats have already indicated their first priority will be legislation battling COVID-19 and offering economic relief, and have signaled a reluctance to raise taxes while the economy is fragile. Taxpayers should exercise serious caution before using planning strategies that would accelerate income in anticipation of tax increases that appear increasingly unlikely to happen immediately.”
• Manning & Napier (Fairport, NY): “Significant changes to tax policy are always difficult to pass, even in times of united, one-party control. Given current projections for a divided federal government, we believe the odds of tax reform have become even less likely. In our view, it is difficult to see how the varied political interests in Washington DC would be able to come together on a topic this controversial.”

Mark Mazur, the director of the Urban-Brookings Tax Policy Center and a former assistant secretary for tax policy at the US Treasury, predicts in an article at the website Law360 that President Biden will “punt” negotiations on Tax Cuts & Jobs Act provisions that expire at the end of 2025 into the next Congress. He thinks that Biden will instead focus on other priorities in his campaign platform. "There's no need to decide in 2021 what the tax code of 2026 will look like," Mazur told Law360.

Analysts from the Urban Institute recently updated their analysis of the Biden tax proposals. They do not foresee an effective date for new tax provisions any earlier than January 1, 2022.

The possible reasons for this delay are explained by John P. Barringer, Managing Partner of Executive Wealth Planning Partners in Denver, Colorado, in his myStockOptions article Stockbrokers' Secrets: Year-End Planning For NQSOs, Restricted Stock, And RSUs. “Even if the Democrats eventually gain control of three branches of the federal government, tax changes are not likely to be the first thing on their agenda,” he writes. “Over the last two years, the Democratic majority in the House of Representatives has passed hundreds of bills to address climate change, racial inequality, police reform, and voting rights. That stack of bills would be the first thing the Senate would want to review if party power changed.... So, with everything a new administration and Congress will have on their to-do list, regardless of the eventual outcome in each chamber, tax changes are unlikely to be addressed until at least 2022.”

What Financial Advisors, Tax Pros, And Lawyers Are Recommending

In its article, Grant Thornton says you should “be very cautious about rushing transactions or asset sales in ways that forfeit value, especially as immediate tax increases now look much less likely. Income and tax acceleration strategies should also be balanced against liquidity needs during this period of economic disruption, and only after considering the time value of money.”

Given the very low interest rates on money saved in the bank that you could apply to paying taxes, an article by CPA and financial advisor Craig Richards of Fiduciary Trust Company International raises the question of whether “it may be worth taking the chance” to accelerate income into this year if you are concerned about higher future taxes.

Jonathan Gassman, a CPA and the CEO/founder of accounting and wealth management firm Gassman Financial Group (New York), emphasized to me that financial planning is very client- and fact-specific. “The election results have not changed my multi-year planning,” he explained. “Our theme for most clients continues to be: accelerate income and accelerate charitable contributions of highly appreciated stock to get the deductions this year as they could be curtailed.”

He still thinks that taxes will be going up at some point, if not in 2021 then in the next few years. This view is shared by some of the other financial, tax, and legal advisors I reached out to. With this prediction in mind, multi-year planning with stock comp would focus on known dates for future restricted stock/RSU vesting and creating a strategy for when to exercise stock options.

Randy Joseph, a CPA with the tax-advisory firm Joseph & Hetrick (Seattle), also takes a multi-year-planning approach that goes beyond what tax rates might be in 2021. “We are cautiously discussing accelerating income and discussing the fact that no one knows what will happen. It’s such a crap shoot.”

Joseph M. Schmerling, a financial advisor and CPA with Schmerling Financial Group (Jenkintown, PA, and Silver Spring, MD), explained to me that year-end tax planning 2020 is different for many reasons. These include not just the tax proposals of President-Elect Joe Biden but also the impact of Covid-19.

“Our approach is to get ahead of disruptions by reviewing our clients plans and stress test the possible outcomes. Ultimately, we are looking for solutions that make sense even within the current fiscal environment,” he said.  “We are not willing to derail the financial progress we’ve made on speculation.”

Estate And Gift Planning For Company Stock

The lifetime exemption amount for gift, estate, and generation-skipping transfer taxes increased in 2020 to $11.58 million per person ($23.16 million for married couples). Lauren Galbraith, an attorney with the law firm Farella Braun + Martel in California, explained in a pre-election article at myStockOptions that by making gifts now, you can lock in the current amount of the exemption, which may shrink in 2026 to about half those amounts—or perhaps even sooner, depending on voting results (see Estate Tax Planning For Large Company Stock Holdings: Four Tips For Using Record-High Lifetime Exemptions).

Now, after the election, she told me this change is probably not coming in 2021. “I do think that the urgency has fizzled and estate and gift tax changes effective retroactive to January 1, 2021, at this point seem highly improbable. Those who are on the margins in terms of whether they want to make significant gifts now may be best advised to hold off and take a wait-and-see approach.”

Bob Keepler, a CPA with the tax advisory firm Keebler & Associates (Green Bay, WI), calculates using basic probability a 25% chance (i.e. 50% x 50%) that the Democrats could take control of the Senate after the Georgia runoff elections. Rather than trying to “see through the fog,” his wealthy clients with substantial assets are going forward and still making gifts to reduce the size of their estates.

He believes that if tax changes do not happen in 2021, they may still occur after the mid-term elections in 2022, as 21 of the 34 Senators up for re-election are Republican. At the very least, he observes, the current tax laws will sunset at the end of 2025.

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Alert: NQDC Participants Affected By 2021 Limits For Qualified Retirement Plans

We now bring you important news for squirreling away retirement savings from our sibling website, myNQDC.com.

In November and December, many executives and key employees eligible to participate in nonqualified deferred compensation (NQDC) plans must decide how much of next year's salary to defer. Factors in this decision about nonqualified plans include the IRS limits that apply to qualified retirement plans (and this year also the outlook for future tax rates after the 2020 election). The IRS just set the qualified plan limits for 2021.

The contribution limits of qualified plans are the major reason for the existence of nonqualified plans: to allow executives and key employees to save additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan.

The changes in limits from 2020 to 2021 are slight. If you've already maxed out your qualified plan contributions for 2020, you will probably do the same in 2021, so you will need NQDC plans to defer any salary and bonus increases you expect in 2021. Also, depending on the election results, there may be higher tax rates next year, increasing the need to defer income.

Contribution type/limit	2020	2021
Compensation allowed in qualified deferral and match calculation	$285,000	$290,000
Elective compensation deferrals	$19,500	$19,500
Catchup contributions for people aged 50 or older	$6,500	$6,500
Total defined contribution limits (employee and employer contributions)	$57,000 + catchup contribution	$58,000 + catchup contribution
Defined benefit plan payout limits	$230,000	$230,000
Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation	$185,000	$185,000
Income threshold defining highly compensated employees for the purposes of nondiscrimination testing; this also applies to the income point where companies can exclude employees from a tax-qualified ESPP	$130,000	$130,000

Set by the Social Security Administration, the Social Security wage cap will rise in 2021 to $142,800, a slight increase from $137,700 in 2020. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $8,537.40 in 2020 and will rise to $8,853.60 in 2021. 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 with an annotated diagram of Form W-2 showing where these amounts are included.

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

Full access to myNQDC is available through individual subscriptions to premium membership or through corporate licensing. To start or renew your Premium Membership at myNQDC, please contact us (617-734-1979, [email protected]). Our online payment system is undergoing technical modifications. We can process your membership directly by phone or email you an invoice.

Year-End Planning: Strategies For Stock Options, Restricted Stock/RSUs, And ESPPs

When the Santa hats and holiday lights are on, you know it's time for year-end financial and tax planning, especially if you have stock compensation, participate in an employee stock purchase plan (ESPP), or hold company shares.

Factors that impact your decisions in year-end planning include:

• your situation, including cash needs that may prompt option exercises and/or stock sales
• whether your decisions should be entirely tax-driven
• what you did earlier in the year with your outstanding stock grant
• whether you will owe additional taxes beyond what was withheld
• your outlook for both your company's stock price and your job
• multi-year projections for your income
• your ability to spread the recognition of income from certain sources over this year and next
• stock options that may expire soon
• grants of stock options and/or restricted stock you expect in the year ahead
• availability of an ESPP and the share purchase dates
• stock trading windows and blackouts and/or ownership guidelines imposed by your company

Tax changes under the Tax Cuts & Jobs Act (tax reform) continue to affect year-end-planning decisions. Meanwhile, the election year ahead in 2020 presents uncertainty about the future of tax laws that affect financial- and tax-planning strategies.

Should Tax Rates Drive Decisions?

Consider the income tax rates and income ranges that fall within each tax bracket for this year and next. With year-end planning, you are looking for ways to shift income between years so that you are paying less in tax, while also considering the outlook for your company's stock.

If you are considering option exercises or stock sales at year-end, you should be aware of the thresholds for higher tax rates and consider keeping your income below them, if possible. In general, financial advisors suggest that investment objectives, expectations for stock-price performance, and personal financial needs—along with tax considerations—should drive your decisions.

7 Strategies

Below are seven strategies suggested from the many ideas in the year-end planning section of myStockOptions.com.

1. You are planning to sell the stock at exercise late this year or early next year. You should calculate whether the ordinary income from a nonqualified stock option exercise will push you into a higher tax bracket and/or trigger the Medicare surtax on your investment gains, and what the taxes will be when the rates and bracket thresholds are adjusted for inflation in 2020. To break up the tax hit from an income spike, you may want to spread the same-day exercise/sale over the end of this year and the beginning of next year. Plus, you'll want to defer exercising into 2020 if you are confident your personal tax rate for the income triggered will be lower.

2. You are over or near the yearly maximum for Social Security. The Social Security wage base for 2019 is $132,900 ($137,700 in 2020). Social Security tax (6.2%) is owed only up to that income ceiling (Medicare tax is uncapped).

• Yearly income already over that threshold: Exercise nonqualified stock options or stock appreciation rights in December without paying Social Security tax so that you can keep an extra 6.2% of the related income.
• If you wait until January, your yearly wage base restarts at $0, and Social Security tax will again apply up to the new maximum for that year.

3. You expect next year to trigger the additional Medicare tax. The Medicare tax rate (normally 1.45%) is 2.35% for single filers with yearly compensation income of more than $200,000 (more than $250,000 for married joint filers). In addition, a 3.8% Medicare surtax applies to investment income, such as dividends and stock sale gains, for people in that same income range.

Example: Your multi-year projections of income show that you will trigger this surtax next year. You have company stock or other investments that you intend to sell soon, you may want to avoid the additional 3.8% tax by selling this year instead of next year.

4. Your restricted stock or restricted stock units (RSUs) vested this year. Unlike stock options, which trigger taxes when you choose to exercise them, restricted stock and RSUs usually give you no control over the timing of your taxes because you are taxed when the shares vest. The two exceptions to this are rare: opting to be taxed at grant instead by making a Section 83(b) election, which is unavailable for RSUs, or having RSUs with deferral features.

At vesting, you own the stock outright and have taxable W-2 income. Therefore, you can try to plan the timing and shifting of other income around this restricted stock/RSU income, as suggested in #1 above. See also the considerations in #6 about whether to continue holding the stock after vesting, which are similar to the question of whether to hold NQSOs exercised this year.

5. You exercised incentive stock options (ISOs) this year, you still hold the stock, and the stock price dropped substantially. While the changes in the AMT calculation under the TCJA make it much less likely you'll trigger the AMT, it is still important to calculate whether you should sell the stock this year (i.e. a disqualifying disposition) to eliminate any alternative minimum tax on the spread at exercise. Not doing this "escape hatch" analysis near the end of the year, especially if your company's stock price fell after an exercise earlier in the year, is a big mistake that many people with ISOs make. Should you decide to sell the stock, to avoid problems with the wash sale rule do not repurchase company shares within 30 days after the sale.

6. The stock price rose (or fell) after your exercise of nonqualified stock options (NQSOs) or your restricted stock/RSU vesting this year. The tax treatment is fixed at the time you exercise options or stock appreciation rights, and at the vesting of RSUs or restricted stock (assuming no Section 83(b) election for restricted stock). This is the tax rule for your federal and state income tax, regardless of the future stock price and whether you hold or sell the stock. You may have planned to sell the stock at price targets after holding it long enough to receive long-term capital gains treatment, but the stock price fell significantly. Therefore, you may want to consider selling the stock to receive a short-term capital loss, perhaps to net the loss against any capital gain, to diversify, or at least to cover any additional taxes that you will owe with your tax return for the spread at exercise or the value at vesting.

Alert: When you sell company stock at a loss to net against gains, be careful about the wash sale rule if you intend to buy the same stock again soon (see our related Forbes.com blog commentary: Year-End Stock Sales To Harvest Capital Losses: Beware Wash Sales). You should wait at least 30 days before repurchasing. However, you can sell appreciated stock for a gain and soon repurchase it without wash sale problems.

Alternatively, your stock price may have substantially increased, hitting your targets earlier than you expected. You may want to sell before the one-year mark because you are concerned that your stock has peaked or that tax rates will rise, or because you are worried about overconcentration in company stock. However, you may not want to pay short-term capital gains rates (i.e. the same rates as those for ordinary income). Check whether you have capital-loss carry-forwards from last year or short-term losses from this year that you can net against these gains. This is a good time to use up these losses against your short-term gains, which can also be created from sales of ESPP shares.

7. You want to donate stock or cash. The end of the year is also a time when many people consider making gifts and donations of company stock. This can be made directly with company stock to a charity or through a foundation or donor-advised fund.

The increase in the standard deduction under tax reform can make donations worth more when you’re trying to still itemize deductions. Look at your prior year’s Form 1040 tax return on Schedule A to see if you are able to itemize or could if you bunch together donations this year to get over the standard deduction amount ($12,200 for individuals and $24,400 for joint filers in 2019). As we have explained before in this blog, once you understand the tax rules, stock donations are often a better approach for appreciated shares held more than one year than first selling them and then donating the cash.

Be sure the stock transfer is completed by December 31 to make it count for the current tax year. For electronic transfers from your brokerage account, the donation is recorded on the day it is received by the charity/foundation (not when you approve the transfer). With increased year-end activity at brokerage firms and charities, plan year-end stock gifts early and have ongoing communications with your broker to ensure the transfer takes place. Donations of private and pre-IPO company stock can take even longer with more documents to complete.

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myStockOptions 2020 Advisor Conference: Save The Date!

The 2020 myStockOptions conference, Financial Planning for Public Company Executives & Key Employees, will be held on June 15 and 16 at the Hilton San Francisco Airport Bayfront. The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with an advisor boot camp on equity comp. A full day of conference sessions with expert speakers will follow on June 16.

Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces! Please contact us ([email protected]) to be notified when registration starts at the early-bird discount rate.

Year-End 2019: myStockOptions Provides Guidance On Tax Planning Ahead Of Election Year 2020

Along with colored lights, Christmas trees, and office holiday parties, year-end is also a key time for financial and tax planning, especially for the millions of employees who have stock compensation or holdings of company shares.

Tax changes introduced in 2018 by the Tax Cuts & Jobs Act (tax reform) continue to affect their year-end-planning decisions. Meanwhile, the election year ahead in 2020 presents uncertainty about the future of tax laws that affect financial- and tax-planning strategies.

To help keep the season merry and bright, myStockOptions.com provides education and guidance on major issues, choices, and innovative financial-planning strategies for the end of 2019 and the start of 2020. This content is available in the website's section Financial Planning: Year-End Planning and through content licensing.

Tax Brackets And Rates Affect Year-End Planning For Equity Compensation And Company Shares

Financial planning at year-end 2019 is more important than ever for employees with equity compensation who are:

• evaluating whether to exercise stock options
• planning to sell shares acquired from restricted stock, restricted stock units, or an employee stock purchase plan (ESPP)
• donating company stock to charities

Multi-year planning for income from stock compensation and stock sales is especially crucial. "You can control the timing of stock sales and option exercises, and you know when restricted stock/RSUs will vest," notes Bruce Brumberg, the Editor-in-Chief of myStockOptions.com. "Employees with equity grants, employee stock purchase plans, and company shares should be aware of the 2019 and 2020 thresholds for higher tax rates on compensation income and capital gains, the additional Medicare tax on compensation income, and the Medicare surtax on investment income." These employees, for example, may want to consider keeping their income below those known thresholds, if possible, while evaluating whether there is enough withholding to cover the taxes owed.

"A big restricted stock/RSU vesting could push your income above the level that triggers the highest capital gains tax rate of 20% and/or the Medicare surtax of 3.8% on investment income," continues Mr. Brumberg. "If your income in the next calendar year will be less than the level that triggers those higher rates, waiting until 2020 to sell stock could give you a capital gains tax rate of just 15% and no Medicare surtax."

Factors That Drive Year-End Decisions

However, tax rates should not be the only consideration, cautions Mr. Brumberg. "Even if you predict that you will be in a lower tax bracket in the future, many experts maintain that tax rates should never be the main reason for exercising options or selling shares, or waiting to do so, at the end of the year. Instead, make investment objectives and personal financial needs, not tax considerations, the driver of your decisions."

Year-End Content Provides Education And Guidance

At myStockOptions.com, the section Year-End Planning has been fully updated for 2019, including revisions for what's different after tax reform. This content includes the following articles and FAQs.

Articles

• 12 Ideas For 2019 Year-End Planning With Stock Compensation (Parts 1 and 2)
• 7 Year-End Strategies For Restricted Stock, RSUs, And Performance Shares
• Year-End Strategies For Employee Stock Purchase Plans
• Stockbrokers' Secrets: Year-End Planning For NQSOs, Restricted Stock, And RSUs
• Stockbrokers' Secrets: Year-End Planning For ISOs
• Leading Advisors Reveal Year-End Strategies For Equity Comp & Company Stock
• Making Gifts Of Company Stock
• Making Donations Of Company Stock
• Six Ways Tax Reform Affects Your Stock Compensation And Financial Planning

FAQs

• What should be on my 2019 year-end checklist of items to review, know, and consider about my stock compensation?
• What are some key planning strategies at year-end 2019 for restricted stock, RSUs, and stock options?
• Next year I may be in a higher tax bracket. I am thinking about exercising my nonqualified stock options before then to accelerate income into this year. What issues do I need to think about?
• If I sell stock this year, I can avoid higher taxes next year, including the 3.8% Medicare surtax on capital gains. What issues should I consider?

Alongside the core year-end articles and FAQs, other FAQs in the year-end section answer advanced tax-related questions, including:

• How can employees defer income to years when they are in a lower tax bracket?
• How do the additional Medicare taxes on high earners affect planning for stock compensation?
• How do employees harvest capital losses against capital gains from company stock holdings?
• Are there strategies for using capital-loss carry-forwards from prior years?
• What risks are posed by the wash sale rule?
• What year-end strategies can help to minimize alternative minimum tax with incentive stock options?
• How can employees save taxes on company stock by making gifts and donations, including those to private foundations or grantor-retained annuity trusts?

All of these questions, and many others, are answered in the section Financial Planning: Year-End Planning. In addition, the calculators and modeling tools at myStockOptions.com allow users to play out various "what if" scenarios with different tax rates and stock prices.

For similar education and guidance on year-end planning for nonqualified deferred compensation, employees can turn to myNQDC.com, a separate sibling publication of myStockOptions.com. Key year-end content there includes the following FAQs:

• At year-end 2019, when I am deciding on salary deferrals into my nonqualified plan for the year ahead, what should be the top issues in my decision-making?
• What are the 2019 adjustments to the IRS limits for qualified retirement plans that affect nonqualified deferred compensation?

Corporate Licensing Available

For companies, education is vital for ensuring that stock compensation motivates and retains highly valued employees and executives. The expert yet reader-friendly content at myStockOptions.com is ideally suited for licensing by companies and stock plan providers for their stock plan participants. For more information, visit myStockOptions.com, email [email protected], or call 617-734-1979. Content from myNQDC.com on nonqualified deferred compensation plans is also available for licensing.

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myStockOptions 2020 Advisor Conference: Save The Date!

The 2020 myStockOptions conference, Financial Planning for Public Company Executives & Key Employees, will be held on June 15 and 16 at the Hilton San Francisco Airport Bayfront. The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with an advisor boot camp on equity comp. A full day of conference sessions with expert speakers will follow on June 16.

Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces! Please contact us ([email protected]) to be notified when registration starts at the early-bird discount rate.

Alert: Newly Issued 2020 IRS Qualified Retirement Plan Limits Affect NQDC Participants

Over at our sibling website myNQDC.com, all about nonqualified deferred compensation (NQDC) plans, an important annual development has just dropped for NQDC participants who are starting to think about how much of next year's salary to defer into their plan's piggy bank.

In November and December, many executives and key employees eligible to participate in NQDC plans must decide how much, if any, of next year's salary to defer. Factors in this decision about nonqualified plans include the IRS limits that apply to qualified retirement plans. The IRS just set these limits for 2020.

The contribution limits of qualified plans are the major reason for the existence of nonqualified plans: to allow executives and key employees to save additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan. The changes in limits from 2019 to 2020 are slight. If you've already maxed out your qualified plan contributions for 2019, you will probably do the same in 2020, so you will need NQDC plans to defer any salary and bonus increases you expect in 2020.

Contribution type/limit	2019	2020
Compensation allowed in qualified deferral and match calculation	$280,000	$285,000
Elective compensation deferrals	$19,000	$19,500
Catchup contributions for people aged 50 or older	$6,000	$6,500
Total defined contribution limits (employee and employer contributions)	$56,000 + catchup contribution	$57,000 + catchup contribution
Defined benefit plan payout limits	$225,000	$230,000
Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation	$180,000	$185,000
Income threshold defining highly compensated employees for the purposes of nondiscrimination testing; this also applies to the income point where companies can exclude employees from a tax-qualified ESPP	$125,000	$130,000

Set by the Social Security Administration, the Social Security wage cap will rise in 2020 to $137,700, a slight increase from $132,900 in 2019. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $8,239.80 in 2019 and will rise to $8,537.40 in 2020. 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 with an annotated diagram of Form W-2 showing where these amounts are included.

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

Premium Memberships And Corporate Licensing

myNQDC is available through individual subscriptions to premium membership or through corporate licensing. To start or renew your Premium Membership at myNQDC, please contact us (617-734-1979, [email protected]). Our online payment system is undergoing technical modifications. We can process your membership directly by phone or email you an invoice.

To learn about our corporate services, see the About Us and Licensing sections of myNQDC. Please contact us (617-734-1979, [email protected]) to obtain more information about licensing content for your website, print materials, and/or newsletters, and for premium memberships at special bulk rates for your staff.

Need CE credits before year-end? Premium members have access to all of myNQDC, including the Learning Center, which offers up to 6 continuing education credits for CFPs, 6 PACE credit hours for CLU® and ChFC® professionals, and 12 CPE hours for ASPPA members.

Give Smart: Year-End Donations Of Stock Instead Of Cash Make Even More Sense After Tax Reform

Whatever holidays you celebrate, this is the season of giving. If you're charitably inclined and hold meaningful amounts of appreciated stock, such as shares acquired from a stock option exercise, restricted stock/RSU vesting, or ESPP purchase, donating stock instead of cash can be a smart tax-planning move. Given the changes in the rules for itemized deductions under the Tax Cuts & Jobs Act (TCJA), stock donations can reduce your taxes by giving you total deductions that exceed your new increased standard deduction amount.

Tax Rules For Stock Donations

After you have held stock for more than one year and its price has risen, at the time of the donation you get a tax deduction equal to the fair market value of the stock (not its cost basis). If the sale of the appreciated shares would have triggered long-term capital gains, your deduction is up to 30% of your adjusted gross income (20% for family foundations), and you can carry forward higher amounts for five years. The Tax Cuts & Jobs Act increased the income limit for charitable contributions of cash to public charities (from 50% to 60%), but not for charitable contributions of stock. Shares gifted to donor-advised funds receive the same tax treatment.

After Tax Reform: Using Company Stock To Bunch Donations

The advice from many experts is to bunch donations so that your itemized deductions go beyond the TCJA standard deduction amounts in 2018 of $12,000 for individuals and $24,000 for joint filers (adjusted annually for inflation). If you do not routinely exceed the standard deduction, you can get over it by bunching donations of stock to charities or a donor-advised fund.

Benefits Of Stock Donations

With a charitable gift of appreciated securities held long-term, the donation you make and the deduction you get are greater than they would be if you were to sell the shares and donate the cash proceeds instead. That is because when you donate shares, you avoid paying the capital gains tax.

Donation Example

Suppose you can either (1) donate $50,000 in stock held more than one year or (2) sell the stock first and donate the proceeds. The stock has a cost basis of $10,000. You have a 40% combined federal and state tax rate on your income and a combined 20% tax rate on capital gains.

Example factors	Stock donation	Cash donation
Combined federal and state income taxes	40%	40%
Tax rate and amount for selling stock	Not applicable	20% / $8,000 (0.2 x $40,000)
Net amount to donate	$50,000	$42,000
Tax savings	$20,000	$16,800

Be Careful With Year-End Timing

To obtain a deduction for the current tax year, the stock transfer must be completed by December 31. For electronic transfers from your brokerage account, the donation is recorded on the day it is received (not when you approve the transfer). Plan your year-end stock gifts as early as possible and have ongoing communications with your broker to ensure that the transfer takes place.

If you have valuable stock in a pre-IPO company, you will want to start the process especially early. Donations and transfers of stock in a private company can take longer than those for stock in public companies and can raise valuation issues.

Special Issues With Stock Compensation

For a charitable donation of company stock acquired from equity compensation, the tax treatment is the same as it is for donations of any stock to a qualified charity or donor-advised fund. If the donated shares were acquired from incentive stock options (ISOs) or an employee stock purchase plan (ESPP), be sure you donate the shares after you have met the related special holding periods for ISO and ESPP stock (more than two years from grant and one year from exercise/purchase). Executives and directors will also want to review the Section 16 and Rule 144 requirements before gifting or donating company stock.

More Ideas For Financial Planning With Stock

For other ideas on year-end financial and tax planning, see our year-end articles and FAQs at myStockOptions.com. Our section on estate planning has additional content related to gifts and donations, such as charitable remainder trusts.

How Tax Reform Affects Year-End Planning For Equity Comp And Company Shares

This is the first year-end season when taxpayers with stock compensation must consider the changes introduced in 2018 by the Tax Cuts & Jobs Act (TCJA). Fortunately, the new tax law doesn’t make any huge changes in the usual year-end steps that you and your financial advisor should consider when you have stock options, restricted stock/RSUs and company stock holdings.

However, there are some key points to know and discuss with your advisor. For example, the new 22% withholding rate on income from stock comp and cash bonuses (lowered from 25%) could mean you’ll end up with a big tax bill in April.

Two Major Types Of Tax Changes

“Tax reform” is the blanket term often applied to the TCJA, which made two major types of changes in the tax laws for individuals. In some areas, the TCJA made straight-up tax cuts. In others, it restructured or eliminated tax provisions. Each of those two categories affects your year-end strategies differently, as explained below.

Tax-Cut Provisions

The TCJA modified the income-tax rate and income ranges of each tax bracket, including the reduction of the top income-tax rate from 39.6% to 37%. However, we still have the same number of tax brackets (lucky seven), and the capital gains tax and the Medicare surtaxes remain unchanged.

What this means: Whenever you consider exercising stock options or selling shares at year-end (or recognize any extra income), you need to know your tax bracket. Even with the lower tax rates that took effect in 2018, you still want to consider the income thresholds that would trigger a higher tax rate and the Medicare surtax on investment income.

In general, you want to do the following multi-year planning, just as you did before the TCJA:

• Keep your yearly income under the thresholds for higher tax rates and know the additional room you have for more income in your 2018 and 2019 tax brackets.
• Recognize income at times when your yearly income and tax rates may, according to your projections, be lower.

Example: You’re a joint filer with $200,000 of taxable income in 2018 and projected taxable income of $180,000 in 2019, putting you in the 24% tax bracket. You have a $120,000 spread on your nonqualified stock options. By exercising just enough options in 2018 to generate $50,000 of additional income (giving you $250,000 for the year), you can then exercise the remaining options in 2019. This lets you avoid the higher 32% tax bracket and both the additional Medicare tax (0.9%) on the income at exercise and the Medicare surtax on investment income (3.8%) when you sell the shares.

2018 Salary	$200,000	$200,000
2018 NQSO exercise income	$50,000 when exercised over 2 years	$120,000 when income in 1 year
Total taxable W-2 income	$250,000	$320,000
Marginal tax bracket	24%	32%
Medicare taxes at sale and exercise	no	yes

The flat withholding rates for supplemental wages, including stock compensation, are tied to the seven income-tax brackets, so those changed too. For income up to $1 million in a calendar year, the withholding rate is now 22%. For amounts of income in excess of $1 million during a calendar year, the withholding rate is 37%.

What this means: The 22% rate of withholding may not cover all of the taxes you will owe on income from an exercise of nonqualified stock options (NQSOs) or a vesting of restricted stock or restricted stock units. You must therefore know the tax bracket for your total income and assess the need to (1) put money aside to pay the additional taxes with your tax return, (2) increase the withholding on your salary, or (3) pay estimated taxes.

Tax Reform/Restructuring Provisions

The TCJA significantly raised the alternative minimum tax (AMT) income exemption amount and the income point where it starts to phase out. This greatly alters the outcome of the AMT calculation for many taxpayers. The new tax law also imposed a cap of $10,000 on the amount of state and local taxes (SALT) available for itemized deductions, and it eliminated personal exemptions.

What this means: It’s much less likely that you will trigger the AMT with an exercise-and-hold of incentive stock options (ISOs), and if you did you will be able to recover it with the AMT credit more quickly than before. At year-end, you want to assess whether to sell shares acquired from an ISO exercise earlier in the year. You evaluate whether to sell those shares to avoid the AMT or exercise more ISOs up to the income threshold that would trigger the AMT. Because of the changes in the AMT calculation under the TCJA, you now have much more room to exercise ISOs and hold the shares beyond the year of exercise without triggering the AMT.

The TCJA also raised the standard deduction to $12,000 for individuals and $24,000 for joint filers. On your tax return, you can either take the standard deduction or itemize.

What this means: If you are holding shares that have greatly appreciated in value, donations of company stock, whether directly to a charity or donor advised fund (DAF), can be a tax-efficient way to both make the donation and get you over the $12,000/$24,000 point where it makes sense to itemize. If you’re not always over that amount, you may want to consider bunching donations together in a single year to exceed it.

Taxes Should Not Control Decisions

Tax reform should not be the primary factor in decision-making at year-end. In fact, tax rates in general should never be the only reason for exercising options or selling shares, or waiting to do so, at the end of the year. Instead, make investment objectives and personal financial needs, not tax considerations, the driver of your decisions.

For more ideas on year-end planning for employee stock options, restricted stock/RSUs, performance shares, or an ESPP, see the year-end-planning section of myStockOptions.com.

Tax Reform Impacts Year-End Planning For Equity Comp

It's officially Thanksgiving week, which also means it's game time for year-end financial and tax planning. Having a solid year-end playbook is more important than ever for employees with equity compensation who are evaluating whether to exercise stock options, sell shares acquired from equity compensation, or donate company stock to charities.

Tax changes introduced in 2018 by the Tax Cuts & Jobs Act (tax reform) significantly affect these year-end-planning decisions. To help, at myStockOptions.com we provide education and guidance on major issues, choices, and strategies for the end of 2018 and the start of 2019 (see our website's section Financial Planning: Year-End Planning).

Tax Brackets And Rates Affect Year-End Planning

Multi-year planning is always valuable with equity compensation, as you can control the timing of stock sales and option exercises, and you know when restricted stock/RSUs will vest. Employees with equity grants, employee stock purchase plans, and company shares should be aware of the 2018 and 2019 thresholds for higher tax rates on compensation income and capital gains, the additional Medicare tax on compensation income, and the Medicare surtax on investment income. In particular, they may want to consider keeping their income below those known thresholds, if possible, while evaluating whether there is enough withholding to cover the taxes owed.

For example, a big restricted stock/RSU vesting could push your income above the level that triggers the highest capital gains tax rate of 20% and/or the Medicare surtax of 3.8% on investment income. If your income in the next calendar year will be less than the level that triggers those higher rates, waiting until 2019 to sell stock could give you a capital gains tax rate of just 15% and no Medicare surtax.

However, tax rates should not be the only consideration. Even if you predict that you will be in a lower tax bracket in the future, many experts maintain that tax rates should never be the main reason for exercising options or selling shares, or waiting to do so, at the end of the year. Instead, make investment objectives and personal financial needs, not tax considerations, the driver of your decisions.

Year-End Content Provides Education And Guidance

At myStockOptions.com, the section Year-End Planning has been fully updated for 2018, including revisions for what's different after tax reform. This content includes the following articles and FAQs.

Articles

• 12 Ideas For Year-End Planning With Stock Compensation (Parts 1 and 2)
• 7 Year-End Strategies For Restricted Stock, RSUs, And Performance Shares
• Year-End Strategies For Employee Stock Purchase Plans
• Six Ways Tax Reform Affects Your Stock Compensation And Financial Planning
• Stockbrokers' Secrets: Year-End Planning For NQSOs, Restricted Stock, And RSUs
• Stockbrokers' Secrets: Year-End Planning For ISOs
• Leading Advisors Reveal Year-End Strategies For Equity Comp & Company Stock
• Making Gifts And Donations Of Company Stock

FAQs

• What should be on my 2018 year-end checklist of items to review, know, and consider about my stock compensation?
• What are some key planning strategies at year-end 2018 for restricted stock, RSUs, and stock options?
• How does tax reform affect stock compensation?
• Next year I may be in a higher tax bracket. I am thinking about exercising my nonqualified stock options before then to accelerate income into this year. What issues do I need to think about?
• If I sell stock this year, I can avoid higher taxes next year, including the 3.8% Medicare surtax on capital gains. What issues should I consider?

In addition, the calculators and modeling tools at myStockOptions.com allow users to play out various "what if" scenarios with different tax rates and stock prices.

For similar education and guidance on year-end planning for nonqualified deferred compensation, employees can turn to myNQDC.com, a separate sibling publication of myStockOptions.com.