Updated for 2024
Year end planning is not just about ending the year strong, it’s about setting a solid foundation for the years to come. High earners with company stock, whether they are vested shares, RSUs, or stock options, have significant opportunities to optimize their finances prior to the close of the year. Let's explore a variety of strategies to maximize your year-end tax benefits and align your company stock with your broader financial goals.
General Year-End Strategies:
- Defer Income: If you anticipate being in a lower tax bracket next year, it may be beneficial to defer income into the next year. This may allow you to use up lower tax brackets and potentially pay less in taxes. This might include selling shares with a large potential capital gain, or exercising and selling Non-Qualified Stock Options, next year as opposed to year end this year.
- Accelerate Deductions: If you are experiencing a higher-income year, you'll want to maximize deductions. For example, if you're planning a significant charitable contribution, making the donation in a year where your income is higher can yield a greater tax benefit.
- Tax-Loss Harvesting: If you are in a high income bracket and generated capital gains this year (sale of stock, sale of real estate, etc.), look for opportunities to sell investments at a loss to offset any realized capital gains. This can help reduce your taxable income.
- Maximize Retirement Contributions: Contributing to retirement accounts like 401(k)s can significantly reduce your taxable income.
- Integration with Personal Portfolio: Coordinate your company stock strategy, whether RSUs or options, with your personal investment portfolio to ensure a well-balanced approach.
- Charitable Giving: If charitable giving is part of your plan, consider front-loading multi-year donations into this higher-income year to get a larger deduction when it counts most.
Strategies for RSUs:
- Tax Rate Analysis: RSUs are taxed as ordinary income when they vest and your company will withhold at a predetermined tax rate. For many high earners, this withholding rate may not be enough which often results in the surprise of additional taxes being owed. If you've had significant RSUs vest this year, talk with your CPA about how to effectively prepare for this additional tax.
- Blackout Period Planning: Factor in any company-imposed blackout periods to your selling strategy, which may limit when you can sell your shares.
- Immediate Sale vs. Hold: If you have RSUs that will vest prior to year end, determine whether to sell vested RSUs immediately to reinvest in a diversified portfolio or hold them for potential future growth.
Strategies for Incentive Stock Options (ISOs):
- Capital Gains Strategy for ISOs: If you want to sell shares before year end, and you have an open window, consider selling shares that will receive long term capital gain treatment. Long term capital gains are taxed at a lower rate than short term, but requires that you’ve held the shares for more than one year post-exercise and two years post-grant.
- AMT Assessment for ISOs: Exercising ISOs can trigger the Alternative Minimum Tax. Evaluate this year's tax situation with your CPA to decide if exercising makes sense. If so, how many shares can you exercise?
- Further AMT Assessment: If you and your CPA determine that you exercised too many shares earlier in the year, and will owe substantial AMT, consider whether it is prudent to sell some of those exercised shares prior to year end. Selling exercised ISOs in the same year of exercise can remove some, or all, of the AMT tax element.
Strategies for Non-Qualified Stock Options (NSOs):
- Timing NSO Exercises: When you exercise NSOs, the difference between your option grant price and the company’s share price is taxed as ordinary income. If you intend to exercise and hold NSOs, and the grant price and share price difference is small, consider taking advantage of this spread—especially if you’re in a low tax bracket.
- Timing NSO Sales: If you intend to exercise and sell your NSOs, and turn them into cash, a lower tax year may be beneficial because you can take advantage of filling up lower tax brackets. The result may be less taxes paid.
Using these strategies can hopefully lead to a more favorable tax situation and a more robust financial standing as you move into the new year. Remember, the effectiveness can depend heavily on individual circumstances, so it's always a good idea to work with a financial advisor or tax professional to create a plan that's right for you.
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