This month, I was a panelist for a year-end tax planning webinar for financial advisors at myStockOptions.com. We discussed year-end tax planning strategies for tech professionals. Below are some of the points I shared that you may find useful. You can also read more about it on Forbes here.
What is year end tax planning?
Year-end tax planning is our time to review how the year went financially and to see what actions we can take to change our tax outcome for the year. These year end tax planning techniques should help us make the most of our tax situation.
For tech professionals, review stock compensation given this year and expected for the next few years. Then, you can determine which strategies you may utilize based on where the stock price is today.
What are the 3 basic tax planning strategies?
When we think about tax planning, we are looking at three components
- How can we reduce income this year? Does it make sense to?
- What tax deductions could we lean into? What are our charitable goals?
- Where can we defer taxes for future years?
Ways to reduce income
When we look at reducing income from a tax perspective, we are making the decision to not receive cash to spend today for the benefit we expect.
You may maximize your 401(k), do a Dependent Care FSA if you have kids in child care, and max out your HSA contribution for the year.
For tech employees with stock options, you may review expected taxable income for the next few years and decide what exercises make sense.
If you have a lot of capital gains each year – either through capital gain distributions or sales, you may review tax loss harvesting strategies. Consult your tax advisor to ensure this meets the IRS guidelines.
Increasing tax deductions with charitable giving
Increasing tax deductions for tech professionals generally means leaning into charitable giving strategies.
Step one is to know what your charitable intent is. You certainly don’t want to let the tax tail wag the dog!
Step two is to consider how to get the biggest tax benefit. Identifying your lowest cost basis stock and donating them to a Donor Advised Fund when you are in a higher income tax year may be advantageous.
This allows you to recognize the market value of your stock for the charitable contribution. You also won’t be forced to sell the shares first and recognize the capital gains. So this may be better than giving cash. Consult your tax advisor for limits and best practices.
Deferring taxes for future years
What we can’t minimize tax wise, we can still consider for deferring into the future! Sometimes I feel like we focus too much on today and forget the bigger picture. Tax deferral can be just as important.
Do you have young kids? Set up a 529 plan and consider a large contribution. This may allow you to grow investments over 10+ years without recognizing capital gains when you sell them for school.
Planning on charitable giving long term but not sure who you want to give it to yet? Set up a Donor Advised Fund to begin contributions now and allow those funds to be invested for a longer-term goal.
Keeping your taxable investment portfolio in mutual funds? It may be beneficial to convert those to an ETF strategy since they do not have the same rule to distribute 90% of capital gains each year as income to you for now.
Sitting on Qualified Small Business Stock with a looming acquisition? There may be gifting strategies to consider.
How does that apply to my stock this year?
In a down market, your strategy might switch to increasing income. If you expect this to be a lower income year compared to future years (hopefully) then this may be your time to lean in. We wrote more about this in our post What should I do in a Down Market?
In a down market, the biggest things for year end tax planning on my mind are:
Review your family burn rate to know what you truly can lean into stock wise. All stock compensation is subject to restrictions. This may be due to trading windows each year or just illiquid pre-public company stock
Review your stock for positions that do not add to your current portfolio strategy and may provide tax-loss harvesting wins
Consider converting pre-tax IRA funds to Roth IRA funds if your total compensation is much lower than expected this year due to a lay-off or stock decline. The best opportunity is when you have cash on hand to pay the taxes for this conversion as well so the full amount may be included in the Roth IRA
If you are at a startup with incentive stock options, consider whether it makes sense to exercise ISOs
Also keep an eye on the 409A valuation expiration date since a down market may mean a lower 409A valuation or minimal increases
How should I think about this for early 2023 tax strategies?
Review your job expectations and career goals. If you plan on making a move in 2023, you may want to consider how that changes your income expectations and the impact of your stock compensation.
What do you expect to vest in stock compensation next year? This will help you understand how taxes may change and when you might want to change your strategy
Do you have any options expiring? What do you need to consider if the company cannot go public before 2024/2025 now?
There are many tax strategies to consider and the right ones for you may be different for another. It’s important to view these as part of the bigger picture of your finances and what will help you get closer to your most fulfilled life.
If you are looking for a financial partner to help you live your most fulfilled life, schedule some time with us to chat. 🙂
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
