Broker Check
Multi-Year Tax Planning

Multi-Year Tax Planning

February 09, 2023

Tax considerations are crucial to understand once your company offers stock options, restricted stock units (RSUs), and more as part of your equity compensation plan. It’s easy to eagerly accept the stock offerings, but without a tax plan, you may prevent yourself from obtaining the full value of that equity compensation.

What is it?

With most tax planning strategies, the goal is to help you save money on taxes. Multi-year planning considers the different tax brackets over the course of a few years. Where it makes sense to opt for the 24% tax bracket rather than the 22% bracket, for example. Your first step when pondering this strategy should be seeking out the advice of a tax professional as they are fully equipped with the knowledge to guide you through this process.

The Basics

The two most common forms of stock options are Incentive stock options (ISOs) and non-qualified stock options (NSOs) with the main difference being how they are taxed. NSOs are taxed like ordinary income when exercised. ISOs are subject to requirements and restrictions while being held and exercised, but they have more favorable tax considerations. Something to consider with setting a plan for multiple years are the numbers of options granted, the exercise price and the vesting schedule. These considerations will shape your plan and how you can save the most.

Other Factors

Consider your employer’s standing in the industry, their objectives and goals, market conditions, financial concerns, legal considerations, and employee retention statistics when setting up your multi-year tax plan. You may expect ISOs as compensation, but your company offers Restricted Stock Units (RSUs) instead to reduce accounting and administrative costs. Don’t be taken by surprise. Pay attention to outside factors that could possibly affect your equity compensation tax plan.

Best Practices

Study the tax brackets each year. Be proactive when developing your tax plan. Your vesting schedule may line up to allow for you to fall in a favorable tax bracket over several years and limit your tax liability. Be ready to adjust when necessary. Being flexible and adaptable to the potential of changes in the market and tax code is key to getting the most out of your equity compensation. As always, it’s best to work with a tax specialist as they will have an intimate knowledge of this world.

Risks and Challenges

There’s always risks and challenges that accompany multi-year tax planning. When maintaining and implementing a stock option plan, you need to consider administrative and accounting costs. There’s always a risk that the value of your option may be less than the exercise price. Following along the lines of being adaptable to shifts in legislation and the market, changes in the tax brackets from year to year could negatively affect your multi-year tax plan. It’s important to keep current on that information.

And Finally…

Understanding the basics of stock options and equity compensation, considering outside factors that shape the market and your company’s financial health, and being flexible when potentially facing the risks and challenges are key to getting the most from a multi-year tax planning strategy. As mentioned earlier, seeking the advice of a tax professional is highly recommended. Good luck!