Year-end financial and tax planning is especially important for the millions of employees in the … [+]
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When the Santa hats, holiday lights, and Christmas movies come on, it’s time for year-end financial and tax planning. This is 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 that I moderated 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 …….
