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Planning for Year-End

Planning for Year-End

December 13, 2022

In the world of equity compensation, the end of the year is crucial decision-making time. The choices you make will affect your 2022 taxes and your financial outlook for years to come. Here are 10 areas of concern you might want to consider with regards to your equity compensation

Understand the Tax Rates

The Tax Cuts & Jobs Act of 2017 (TCJA) created our current tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These brackets will remain until 2025, when they will return to the percentages of 2017. Barring any future legislation that would make further changes. The supplemental wage rate is based on these seven brackets. The supplemental wage rate will be at 22% for supplemental wages totaling up to $1 million dollars and if your supplemental wages go above $1 million, you’re looking at a tax rate of 37%. Know your tax brackets.

Supplemental wages include income received from exercising Non-Qualified Stock Options (NQSOs), the vesting of Restricted Stock Units (RSUs), from stock appreciation rights, the release of RSUs and other equity grants that subject to withholding, cash, bonuses and Nonqualified Deferred Compensation (NQDC) payouts.

Multi-Year Tax Planning

One strategy you might want to consider is one that would span over a few years, shifting your income between years so that you limit your tax consequence. The knowledge of when your stocks and RSUs might vest coupled with the timing of option exercises and stock sales is an added advantage with a multi-year tax planning strategy. There are other decisions you may need to make, such as waiting to exercise NQSOs from December of the current year to January of the next year. This could potentially allow you to invest the funds that would be used to pay some of the tax for an additional year.

The Additional Medicare Tax

The Medicare tax rate — normally 1.45% — is 2.35% for single taxpayers with incomes over $200,000 and joint filers with incomes over $250,000. This applies to income from Stock Appreciation Rights (SARs), the exercise of NQSOs and from the vesting of RSUs. There’s also another 3.8% Medicare surtax that applies to investment income for capital gains from stock sales and any dividend income you may earn — gains from selling shares that have been held. It’s important to remember that income from vesting, exercising, or purchasing will increase your Adjusted Gross Income. This surtax, however, does not apply to income from RSU vesting, stock option exercises or purchasing ESPP shares.

The Alternative Minimum Tax (AMT)

The AMT makes sure that everyone pays their fair share (or the minimum amount) of taxes by placing a floor on the tax rate so no matter the deductions and credits, there’s still tax owed and paid. A tax professional should prepare an AMT projection to highlight what amount would activate the AMT. The recent updates from the TCJA reduces the likelihood of activating the AMT if you exercise ISOs before the end of the tax year and hold onto the stock.

Selling Stock

A popular time to sell your stock is at year-end, but you might want to think about delivering those shares with the highest cost basis. This will minimize the taxable proceeds. ISOs and ESPP shares in a disqualifying position might cause unwanted tax consequences. It’s also crucial to change any default standing orders on your accounts. An order can be changed only up to the settlement date.  You might also consider the decision to alter standing orders in your account for shares to use at sale. For example, stock acquired from option exercises, RSU vesting or ESPP purchases. If you decide not to alter these standing orders, it will revert to “first in, first out” (FIFO) when you sell the company stock.

Donate to Charity

When you donate appreciated stock that you have held for over one year past the date of the option exercise, you could be in line for a charitable deduction for the full market value at the time of the donation. Same holds true for donating income from RSUs or vesting RSUs. Consider making these charitable donations directly from securities provided from an ESPP purchase or vesting RSUs in lieu of gifting cash. Gifting securities directly to a charity you could avoid the capital gains tax.

Gifting Stocks

Speaking of gifting, you’re allowed to make annual gifts up to specified limits without gift tax implications. Just be sure that this type of gift doesn’t result in a disqualifying position of ISO or ESPP stock. The long-term capital gains rate is 15% for most taxpayers and 20% for those in the highest ordinary income bracket. Taxpayers who are in the 10% or 12% bracket qualify for 0% capital gains tax rate.

Harvest Capital Losses

To offset your gains, think about harvesting losses on any stock you once owned that has dropped. Capital losses offset capital gains by a dollar-to-dollar ratio. Also, your capital-loss carry-forwards from previous years can be used to reduce any net capital gains for the year. For individual tax filers, you have up to $3,000 of gains that can be off set, while married couples who file separately have a limit of $1500 each.

Evaluate Local Taxes

Don’t forget to consider the net effect of your state and local income taxes when an RSU is vesting or if you’re exercising NQSOs. Also, any state and local income taxes paid in connection with your exercise are an itemized deduction in determining your regular federal income tax liability. Under the TCJA, you’re allowed to deduct up to $10,000 for a combination of state and local taxes, sales taxes and property taxes.

Exercising Options for Depressed Shares

This strategy works best if you intend to hold onto the shares and your options will expire soon. When you exercise NQSOs, you’re required to pay ordinary income tax on the difference between the exercise price and the fair market value of the shares at the time of the exercise. This amount also affects the calculation of your AMT. Don’t consider this strategy if your shares have fallen so far that the options are out of money.


Talk with your financial professional before committing to anything on this list. Speak with a tax professional with regard to your tax consequences when considering the items on this list. If you’d like to learn more, please reach out and I will assist you to the best of my ability.