Editor's Note: Most of the planning ideas and strategies discussed below continue to apply under the Tax Cuts & Jobs Act (tax reform), which took effect in 2018 (see the related article). Our year-end content will be fully updated for 2018 in September.

Year-end planning can be tricky amid the ongoing impact of tax-rate changes that took effect a few years ago and expected tax reforms. We asked five financial advisors for their ideas on financial and tax planning at year-end. Here are their responses, presented in their own words. (The opinions expressed in the text below are those of the authors and do not necessarily reflect the views of their employers or myStockOptions.com.)

For year-end ideas from two other financial advisors, see Stockbrokers' Secrets: Year-End Planning For NQSOs, Restricted Stock, And RSUs.

Richard Friedman
The Ayco Company
Albany, New York

Podcast: In addition to the year-end tips below, you can also listen to our interview of this author on general financial planning for restricted stock and RSUs.

Year-end planning this year for company stock holdings or exposure probably should continue to focus on traditional tax planning and asset diversification concepts. However, individual planning priorities may also be based on your position at the company (key executive or salaried employee) and the amount of compensation payable to you in stock. With more long-term incentive awards that become payable only if performance metrics are earned, you may be less able to control the timing of equity-based compensation than in the past. Here are some issues to consider.

With more long-term incentive awards that become payable only if performance metrics are earned, you may be less able to control the timing of equity-based compensation than in the past.

Review stock option exercise strategy. If you hold in-the-money stock options that are scheduled to expire in the near future, e.g. by the end of 2018, or if you anticipate terminating your employment in the near future, you should review whether it makes sense to exercise valuable options before year-end. For NQSOs, the manner of exercise (cash, stock swap, or cashless) should be reviewed, along with how required tax withholding will be paid (share withholding or cash). Some, but not all, employers have adjusted the maximum allowed withholding rate above the default 25% rate for supplemental income (the rate is 39.6% for amounts over $1 million), so you should check whether your company has done so. Any tax analysis also should consider state and FICA/Medicare taxes. For incentive stock options, the manner and timing of exercise should be considered, along with alternative minimum tax (AMT) considerations. This could lead to a plan to exercise ISOs in 2018 if any tax-law change eliminates the AMT.

Deferral of RSUs or other stock-based compensation. This could be a tax-savings planning tool, it but comes with risk. If your employer allows you to defer RSUs, performance share units, or other stock-denominated compensation, you should review the timing and procedure for making a valid deferral election. Under IRC Section 409A, this procedure may be part of, or separate from, the company's election window for the deferral of salary and bonuses. You should also review whether any deferrals must remain denominated in company stock units, which is common due to the more favorable accounting treatment to the company, or whether you have a choice in the crediting rate for any amounts deferred. You also may have an opportunity to decide the timing of distributions with respect to current-year deferrals.

401(k) and ESPP planning. Many companies are now limiting or prohibiting elective deferrals into a company stock account, but if company stock is an available investment option in your 401(k) plan, year-end can be a good time to review your overall asset allocation and risk strategy. If your company matches your contributions in company stock, you should have an opportunity to move that match into other investments available under the plan. This should be reviewed. If your company offers a broad-based employee stock purchase plan, review the amount of any purchase price discount and when offering periods commence. If you don't receive stock-based compensation, an ESPP can be your opportunity to acquire stock, often at a discount, through convenient payroll deductions.

Follow your company's compliance policies and the SEC's rules. All employees, especially executives, should review corporate policies regarding the purchase and sale of company stock. In some cases, these policies are not only for senior executives and directors but also for a broader range of employees. Trades can be subject to window periods, when transactions are allowed to occur, or blackout periods, when company stock transactions are prohibited. Also review company policies on the use of a Rule 10b5-1 trading plan, to help avoid insider-trading charges, and more common restrictions on the hedging or pledging of company stock. Most public companies now have share-ownership requirements for certain executives and share-retention requirements for stock acquired as compensation. Review what shares count toward meeting these requirements, when measurement occurs, and what consequences apply if these corporate policies are not adhered to.

Miscellaneous tax-planning opportunities. If you travel for work to multiple states and receive stock options, RSUs, or any long-term incentive award as compensation, you will need to review with your tax advisor possible nonresident state-tax issues. These rules can be confusing, and more companies are now taking affirmative action to report and withhold taxes to nonresident states for mobile executives.

Editor's Note: For more on tax issues for employees who work in multiple states or change state residence, see FAQs on the impact for stock options and restricted stock/RSUs.

Income-tax planning for stock-based compensation must also take into consideration the 0.9% Additional Medicare Tax for taxpayers with family income above certain thresholds. This can impact a decision about when to exercise nonqualified stock options or make a Section 83(b) election for restricted stock. (The IRS recently modified its rules to permit the e-filing of a federal tax return for the year in which an 83(b) election is made.) Planning to minimize or avoid the golden-parachute excise tax in the event of a change in control (CIC) can involve maximizing taxable compensation prior to the year of the CIC.

Editor's Note: For more on the Medicare tax increases that took effect in 2013, see the related FAQ elsewhere on this website.

Before gifting company stock to younger family members for estate-planning purposes, review the implications of the current federal estate-tax limits. In many instances, a stepup in basis for company stock (as well as any capital asset) upon death can now provide a more favorable long-term tax result. Year-end can be a chance to benefit by using appreciated company stock to make gifts to qualified charities that can provide favorable income-tax treatment and the avoidance of capital gains.

Henry E. Zapisek, CFP
Cetera Advisor Networks
San Diego, California

Three and one half actions you need to take before year-end. The number-one action item is taking a current inventory of your company stock holdings. This includes your held shares, restricted stock units (RSUs), nonqualified and incentive stock options, and warrants. You need a year-end snapshot of your equity holdings and equity compensation. The pertinent information, such as your cost basis of held shares and the vesting/exercise details of your RSUs and options, must be verified and updated as necessary. The key to making the right financial decisions is accurate information.

Update as necessary your cost basis in held shares and the vesting/exercise details of RSUs and options.

The second action item is to update your timeline with regard to the vesting/exercise dates of your RSUs, options, and warrants. Create and review reminders to give yourself enough time to work with your advisors to effectively manage your held stock and other equity compensation. Proper planning with your tax advisor will help avoid surprises in April 2017 and assist with cash-flow planning to meet your income tax obligations.

Third, January can be an excellent time to exercise vested "in the money" incentive stock options (ISOs). An exercise in January gives you the ability to time and control your alternative minimum tax liability. The sale of these exercised ISO shares in the same year results in a disqualifying disposition, which removes the threat of the AMT. On the flip side, if the sale occurs in the following year, you can qualify for favorable capital gains rates.

The final action item is to review your entire financial holdings against the backdrop of your company stock and equity compensation. Be very careful of concentration risk. The goal of every prudent investor should be balance and consistency in the investment process.

Sheri Iannetta Cupo, CFP
SageBroadview Financial Planning
Morristown, New Jersey

Rather than letting your equity compensation drive your financial circumstances, flip that planning on its head. First define your life's goals—such as educating your children, achieving a desired lifestyle, or retiring within a particular timeframe—and then let those goals drive your stock option or restricted stock decisions. That being said, you still want to make tax-smart decisions. We advise working with a tax professional to create a multi-year tax projection using your best estimate of what your 2017, 2018, and 2019 tax situations will look like. Then deploy the tax-planning strategies for your stock options and company stock that seem most appropriate.

If you plan to hold the investment for a few years or more, consider harvesting the gain by selling the appreciated position and then buying back the investment, thereby resetting the cost basis higher to help with any future sales.

Key metrics to know about your tax situation include:

  • Are you subject to regular tax or the alternative minimum tax?
  • What is your marginal tax bracket?
  • Are your itemized deductions and/or personal exemptions being phased out?
  • Are you subject to the 3.8% Medicare surtax?

Some tax-planning ideas follow:

Capital gains. For people who (1) have appreciated positions in their company stock holdings, (2) have no loss carry-forwards, and (3) in 2017 expect to be taxed at a 15% or lower long-term capital gains rate AND expect to avoid the 3.8% Medicare surtax:

  • If it is likely the money will be needed sooner rather than later (e.g. for college), or if you anticipate you will change the investment in the near future (e.g. you have a concentrated position in employer stock, so you plan to sell to invest proceeds in a diversified portfolio), then consider harvesting long-term capital gains this year.
  • If you plan to hold the investment for a few years or more, consider harvesting the gain by selling the appreciated position and then buying back the investment, thereby resetting the cost basis higher to help with any future sales. Keep in mind that wash sale rules apply only to losses. The shorter the period between the gain-harvesting sale and your second long-term capital gains sale, the more favorable gain harvesting becomes. Additionally, the greater the difference between your 2017 tax rate and the tax rate when you resell the stock, the greater your potential return from this strategy. For example, if you expect to be in the 0% capital gains bracket in 2017 and then the 15% or 20% bracket in 2018, consider harvesting the gain in 2017 to get a free step-up in basis. Or, if you expect to be in the 20% capital gains bracket in 2018 and therefore subject to the 3.8% Medicare surtax, consider harvesting the gain in 2017.
Editor's Note: For more details on selling stock to reset the basis, see a related FAQ.

For people with an appreciated stock position and substantial loss carry-forwards: If you expect that you will incur higher tax rates in the near future, then consider preserving the loss carry-forwards by deferring them to a year when they can be applied against a higher capital gains rate, providing you with greater tax savings.

Alternative minimum tax (AMT): for people in it now and likely to stay in it. When planning for AMT, create a tax projection to find the break-even point where your regular tax liability and your AMT tax liability are equal. Then you can better understand how the AMT affects your tax liability. The AMT exemption amount is subject to a phaseout. This phaseout can cause even higher tax rates (marginal rates between 32.5% and 35%) because each additional dollar amount of income causes $0.25 of the AMT exemption to phase out until the full AMT exemption amount has been phased out.

  • You can consider exercising incentive stock options in years when they will not phase out the AMT exemption.
  • Conversely, you may wish to shift more income into high-income years when the AMT exemption has already been phased out and you would benefit from paying tax at the 28% top AMT tax rate rather than at a higher ordinary tax rate.

Chuck Steege, CFP, CEP
SFG Wealth Planning Services
Doylestown, Pennsylvania

Take time to review your vested stock options and check for impending expiration dates, including any in-the-money stock option grants that may expire in the first quarter. If you expect your tax rate to be higher in 2018, due to a promotion at work or another rise in taxable income, it may make sense to exercise stock options in 2017 that are slated to expire in the first quarter of next year. An executive who is retiring soon (and expects to benefit from a lower tax rate in 2018) may choose the opposite strategy and exercise closer to expiration next year.

If you plan to exercise before year-end, check your company's calendar for selling windows. Many companies have deadlines for option exercises and stock sales that close prior to the end of the year.

Exercise at or near expiration. Unless your tax situation calls for it, don't be hasty to exercise nonqualified stock options (NQSOs) early. Even if you plan to hold the stock for a long term and are considering an exercise now to start the capital gains period, think carefully before proceeding. Studies have shown that NQSOs generally make the most money when they are kept tax-deferred for as long as possible. It's a good idea to wait to exercise stock options until close to the expiration date of the option term. Any exceptions for tax purposes should be reviewed by your tax advisor.

Robert Gordon
Twenty-First Securities Corporation
New York, New York

Podcast: In addition to the year-end tips below, you can also listen to our interview of this author on hedging strategies for stock compensation.

Roth conversions: optimizing the recharacterization option. Roth conversion rules allow an investor to recharacterize (or "undo") a conversion. This makes sense when the value of the Roth declines substantially, making the tax bite disproportionate to the Roth's value. The government gives Roth converters the choice to reverse any conversion. That recharacterization election may be made at any time before the tax filing becomes final for the year of conversion. For those converting in 2018, that timeframe can stretch until October 2019 (if you have filed a six-month extension of your tax-return deadline). Thus if you convert on January 6, you will have 21 months to measure performance. Alternatively, if the conversion takes place in November 2018, for example, the maximum time will be cut to 11 months.

To further maximize the recharacterization possibility, investors should use multiple Roths so that they can keep the ones that performed well and recharacterize the Roths that didn't do so well. One thing seems clear: anyone who is going to convert should do so in the beginning of the year to give themselves a maximum amount of time to be able to see how the investments have performed and then make the critical recharacterization decision.

Editor's Note: Your stock compensation can help to pay the additional tax you will owe because of the Roth conversion (for details, see an article series elsewhere on this website).

Why January 1 is the time to exercise ISOs. Incentive stock options (ISOs) are thought of more favorably than nonqualified stock options because ISOs can create capital gains while NQSOs create ordinary income. When employees exercise ISOs, no immediate taxable income is created. When an ISO is exercised, a new capital gains holding period is established with the employee's cost basis being the price paid for the stock (the exercise price of the option).

Employees should exercise their ISOs at the very beginning of the year, giving them a full year to make a sell decision that would have no AMT impact.

The ISO stock holding period begins on the day when the options are exercised. If the employee holds the stock more than 12 months from the exercise date (and 24 months from the grant date) and recognizes a gain upon the sale of the shares, the gain is considered long-term. If the stock is held less than 12 months, part of the gain is considered compensation and is taxed as ordinary income (see an FAQ with examples). ISO stockholders, therefore, have an incentive to hold shares at least 12 months.

But that creates a dilemma. Should ISO shareholders hold the stock and hope for more gains, or should they sell immediately after exercise? The costs of being wrong can be dramatic but not always obvious. If an employee decides to hold the shares, there is the alternative minimum tax (AMT) trap to consider. In calculating the AMT, the difference between the purchase price (option strike price) and the market price is considered income. Importantly, the income is not AMT income if the shares are sold in the same calendar year as the option exercise. This is many times confused with the 12-month period necessary to qualify for long-term gains rates.

Unfortunately, many employees have seen the price of their ISO stock crash during the year after exercise as they waited for their shares to go long-term. Without AMT liability, an ISO stock collapse would damage the stockholder economically but not in terms of taxes—in fact, if the shares are sold below the exercise price, the employee could possibly realize a capital loss. But if the ISO exercise has triggered an unforeseen AMT liability, the employee could owe significant taxes on worthless stock.

Because of this, employees should exercise their ISOs at the very beginning of the year, giving them a full year to make a sell decision that would have no AMT impact. If the stock falls, they should sell before December 31, which would trigger a short-term gain or loss but eliminate the AMT liability. At year-end, if the stock has risen, they could hold for a few more days into January for the 12-month holding period to be achieved and then sell for a long-term gain. This approach could trigger the AMT, but the economic gain should outweigh the tax liability. By contrast, if an ISO is exercised in October, the employee has only a short time before the end of the year to decide whether to sell before December 31 and avoid the AMT or hold for nine months more in order to qualify for long-term treatment.

Incentive stock options have proved a wonderful device for motivating employees, but they must be managed carefully. The takeaway: exercise in January for maximum flexibility, and remember to observe the value of the shares that are purchased before year-end—or expect the possibility of an AMT bill in the following April.

John C. Lawson
Formerly with Tompkins Financial Advisors (now retired)
Rochester, New York

Executives contemplating transitions to new employers or to retirement during the year ahead should consider the impact of the transition on the potential after-tax value of their employer stock awards—especially as a new tax year approaches with so much value dependent not only on personal income and investment tax rates but also on estate and corporate taxation as well.

Executives contemplating transitions to new employers or to retirement during the year ahead should consider the impact of the transition on the potential after-tax value of their employer stock awards.

For stock options, the impact could range from forfeiture of all vested and unvested grants upon separation, to retention of all grants to the original expiration date. The policy will vary from employer to employer, and your latitude to negotiate may be limited, but you should at least understand the rules so that your financial planning can be adjusted accordingly. You may well have planned to bank on the time value and tax deferral inherent in an option with three or more years left to expiration, but suddenly realize that your transition requires you to exercise vested options immediately or within a few years, and to forfeit all unvested options. Consequently, your tax planning is disrupted and potential gain reduced.

For restricted stock, restricted units, and performance share arrangements, the impact will range from forfeiture of unvested grants to continued vesting per the original schedule and pro rata performance awards. In any event, remember that vesting triggers taxation of the shares at the fair market value on the vesting date (unless you had previously elected to defer receipt under a plan having this feature, in which case only Social Security tax will apply at vesting). The market value is taxed as ordinary income, which then serves as the basis for the later sale of the shares at a capital gain or loss.

Suggested actions:

  • Review your employer stock award notices to assess what grants will be forfeited upon separation, which grants will vest immediately, which will vest in accordance with the original schedule, which will retain their original term, or which will suffer a truncated term.
  • If disposition of a grant upon separation is subject to employer discretion, seek a decision as soon as is practicable.
  • Before separation, verify with the stock plan administrator that your account will properly reflect the correct post-employment status of each grant, and establish a contact for follow-up.
  • Know the income breakpoints for personal marginal tax rates.
  • When changing employers, investigate qualified and nonqualified pre-tax deferrals of salary and bonus at your new employer to offset the stock awards, severance, and SERPs that may be taxable in the same year upon separation from your current employer (see myNQDC.com for more on nonqualified deferred compensation).
  • Try to time your separation to occur in the year that minimizes the tax burden of accelerated vesting and shortened option terms.
  • However, don't let focus on tax-effectives blur considerations of stock potential and opportunity costs.

See other sections of this website for more details about stock compensation in both job termination and retirement planning.

Editor's Note: For more year-end ideas, see other articles and the FAQs in our content section on year-end planning. Looking for a financial advisor who specializes in equity compensation? Search our AdvisorFind directory.

The advisors who submitted written remarks for this article did not pay myStockOptions.com to have them included and were not compensated for their contributions. The statements made in this article do not constitute personal investment advice and may not apply to your individual circumstances. Consult a financial advisor directly to obtain guidance on your personal financial situation.