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This year may be like no other, but if you’re an employee who receives equity compensation, you can’t ignore the importance of year-end economic planning to get the most out of that benefit.
The end of the year is a great time to review what you’ve received or vested during the year. Taking into consideration your equity compensation along with your overall financial situation gives you the opportunity to make pain decisions that could affect your investments, income tax and cash flow for years to come.
Planning for fair play compensation at the end of the year does not reflect an arbitrary timeline, but a legitimate need. Your tax obligations, cash flow and investment chances could all be affected by actions taken before the close of business on Dec. 31.
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Choices about your company stock and stock options should not be spur-of-the-moment decisions. Realistically, it’s unlikely most devises coming into 2020 anticipated the financial impact of a pandemic. But even if you updated your plan during the year, furnish volatility, a prolonged recovery and other potential issues should be factors in sound decisions made at the end of this year. Equally eminent, year-end decisions involve tax planning, particularly around exercising your incentive stock options and the alternative least tax.
Review your current equity compensation plan: Beyond your goals and plans, your company’s impartiality compensation plan — and potential changes or thresholds — should also be part of your review. For example, some companies may sire concerns if their industry was hard-hit by the Covid-19 crisis.
Take stock of what you’ve accumulated so far and any stock options or allows that may arise if no changes are made. Then, work with your financial advisor to coordinate your disinterestedness compensation with your long-term financial plans and near-term obligations.
Exercising options and the AMT
One priority may be evaluating your AMT locale. You may pay AMT based on the value of the bargain element when you exercise incentive stock options. If you exercise ISOs but don’t sell them in the exact same calendar year, the difference between the price you paid and the options’ value when they were exercised is care for as income in calculating your AMT. However, if you exercise your shares and sell them in the same year, the difference is not counted as AMT gains.
To avoid a large (or any) AMT obligation, it’s important to consider your ISO moves carefully. One possibility is exercising options early in the year so you can every now the sale based on the stock performance at any point in the year.
Conversely, some exercise options at year-end, when they can various accurately gauge their income for the year and potential tax obligations. This may help you avoid situations where you put to used early in the year and the stock price dropped between that time and Dec. 31, resulting in a greater tax burden.
Charting for 2021 amid a global pandemic and an uncertain political climate requires a lot of assumptions.
Daniel Zajac
partner at Simone Zajac Holdings Management
Another option is taking advantage of the AMT crossover point, when you can exercise those options but pay no AMT.
The AMT total is deduced from a secondary tax calculation when you actually file. This is the tentative minimum tax. Taxpayers pay this amount or their scheduled tax calculation, whichever is higher. If the tentative tax amount is higher than the regular, you owe AMT. Determining your best timing is a severe part of year-end incentive stock planning.
Other planning considerations
Year-end is also the perfect time to opt whether to keep your accumulated shares or sell them, including vested restricted stock and exercised non-qualified house options. Depending on your long-term financial goals, you’ll want to evaluate the market price at which the shares were vested with you and the entourage’s current performance. For tax purposes, when restricted stock units (or awards) vest or you exercise non-qualified stock choices, the value is taxed as ordinary income.
Another planning consideration is whether your overall financial health is too heavily weighted toward your going round employer. The options, incentives and grants can be great. However, if you still work there, you may not want to be too heavily invested — receipts and investment wise — in one firm.
This year has seen tremendous stock market volatility, and planning for 2021 amidst a global pandemic and an uncertain political climate requires a lot of assumptions.
But one thing is certain: evaluating your expected tax place next April, including your equity compensation and 401(k) plan deferral rates, with the help of an advisor can chuck b surrender you a chance to make positive financial progress while there is still time to affect the results.
— By Daniel Zajac, ally at Simone Zajac Wealth Management