Editor's Note: This article will be updated to include any ideas specific to the 2020 year-end-planning season that the advisors may have. Meanwhile, many of their year-end-planning ideas apply every year.

Year-end planning can be tricky. We asked several leading financial advisors for their ideas on financial and tax planning at year-end. Below are their responses, presented in their own words.

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

Sheri Iannetta Cupo
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 2020, 2021, and 2022 tax situations will look like. Then deploy the tax-planning strategies for your stock options, restricted stock/RSUs, and company shares 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 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 2020 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 2020 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 2020 and then the 15% or 20% bracket in 2021, consider harvesting the gain in 2020 to get a free step-up in basis. Or, if you expect to be in the 20% capital gains bracket in 2021 and therefore subject to the 3.8% Medicare surtax, consider harvesting the gain in 2020.
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 AMT 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.

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Chuck Steege
SFG Wealth Planning Services
Doylestown, Pennsylvania

Check for impending expiration dates, including any in-the-money stock option grants that may expire in the first quarter.

Take time to review your vested stock options. 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 2021, due to a promotion at work or another rise in taxable income, it may make sense to exercise stock options in 2020 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 2021) 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.

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Daniel R. Zajac
Simone Zajac Wealth Management Group
Exton, Pennsylvania

Year-end planning for company stock and stock options should focus on both the big picture and the details. Big-picture items can include a review of your goals, objectives, and financial plan. A year is a long time for a stock price, and fluctuations in your company’s stock price may have made a material impact on the direction of your financial plan. If you haven’t taken the time to update your plan, year-end is a good reminder.

Specific year-end decisions may involve detailed tax planning up to important tax breakpoints.

Even if you have been updating your plan, year-end is a good time to strategize for the following calendar year. This may be even more important if you see major changes in your situation or that of the company. Retirement (see my related article), a new job, or a change in control of your company may have made a material impact on your plan. Being in front of the change with diligent planning may be strategically beneficial.

More specific year-end decisions may involve detailed tax planning up to important tax breakpoints. For example, you should consider exercising incentive stock options (ISOs) up to the alternative minimum tax (AMT) crossover point, the point where you can exercise ISOs and pay no AMT. You can also consider selling shares from previously exercised ISOs to the point where your adjusted gross income hits a higher capital gains tax rate, the threshold where AGI reaches the Medicare surcharge tax, or the point where you reach the AMT phaseouts.

Other specific year-end planning may include selling ISO shares in an intentionally disqualifying disposition should the stock price have dropped during the calendar year. This may protect you from paying more in AMT than what the stock is actually worth.

Finally, your planning can include an analysis to test the benefit of exercising nonqualified stock options or selling shares from restricted stock/RSU vesting or an ESPP purchase, any of which can increase your adjusted gross income. A higher adjusted gross income may create additional room to exercise ISOs with no AMT. An exercise-and-sell may also create cash that can be used to buy other shares or pay a pending tax bill.

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Bruce R. Barton
Parkworth Wealth Management
San Jose, California

If your company went public or was acquired this year, a charitable contribution to a donor-advised fund could reduce your tax bill on stock sales (assuming your itemized deductions exceed the standard deduction on your tax return). The contribution will also reduce your taxable income should you have a compensation income spike from a stock option exercise or restricted stock/RSU vesting.

A charitable contribution to a donor-advised fund could reduce your tax bill on stock sales.

A donor-advised fund is a charitable account you set up with a donor-advised-fund sponsor, which is a public charity. You receive a charitable tax deduction for your donation in the year you make your contribution. You can then make grants from your account in future years without having to make contributions. A donor-advised fund allows you to "delink" when you make charitable contributions for tax purposes from when you make contributions to your favorite charities. Timing large contributions for years when you have high income reduces income tax in those high-income years.

Cash is typically the worst asset to give to charity, which is why donor-advised funds accept other types of assets (including publicly traded securities) and complex assets (including private company stock, real estate, and partnership interests in venture capital funds, private equity funds, and hedge funds). Many people make the mistake of selling an appreciated asset, such as a stock or mutual fund, paying tax on the capital gain, and then donating the after-tax proceeds to charity.

For maximum tax savings, it's best to donate appreciated securities. Your charitable tax deduction is the full market value of the assets you contributed, as long as you held the assets for one year or longer. (If you owned the contributed assets for less than one year, then your deduction is limited to the cost basis of the property you contributed.) By contributing appreciated assets held for one year or longer, such as low-cost-basis stock or mutual fund shares, you receive a charitable deduction for those assets' full value in addition to completely eliminating capital gains tax on those shares. It's a two-for-one tax deal. The net result is that you pay less tax and have more assets available to donate to charity.

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Kent T. Hickey
Legacy Planning Partners
Allentown, Pennsylvania

Begin with the end in mind. Equipped with your lifetime and financial goals, you and your advisors can design your equity compensation strategy to support and achieve those goals.

A well-designed equity compensation strategy can minimize the emotional rollercoaster of decision-making when the stock price is most volatile.

Take inventory of your holdings, including NQSOs, ISOs, RSUs, PSUs, ESPPs, and company stock holdings in taxable and retirement accounts. Include vested, unvested, and performance shares for which metrics have been achieved but shares have not yet vested.

  • Keep a schedule of vested and unvested shares and their expiration dates.
  • Plan for vesting and receipt of RSUs and PSUs throughout the coming year.
  • Request your company's open selling windows so you can exercise "in the money" options before expiration.

Maintain your inventory. Know your holdings and the cost basis of owned shares and you will easily identify which shares to sell to fund your goals, manage tax impact, avoid losing shares to expiration, and reduce single company stock risk.

Know your plan rules so you can accomplish your goals within the requirements.

  • Have you accepted all grants when offered?
  • Does an 83(b) election for restricted stock (not available for RSUs) make sense for tax planning?
  • What happens to equity compensation in the event of death, disability, change of control, retirement, termination, or separation from service? How would each of these events affect your goals?
  • Planning a transition? Consider your forfeit value and the grants, vesting, and value of what you leave behind based on your departure date.
  • Does your company offer a nonqualified deferred compensation (NQDC) plan? Have you considered pairing the NQDC to accelerate progress toward your goals while improving tax efficiency?

Improve your results by knowing the equity compensation rules when considering a company transition, adjusting your tax strategy, or negotiating your next opportunity.

Review your equity compensation strategy. A good strategic plan will clarify your decisions and actions throughout the year.

  • How much of your assets are tied to your company stock?
  • Are you inadvertently adding to an already concentrated portfolio?
  • What is your strategy for buying, selling, exercising, or holding options/shares to achieve your financial goals?
  • Do you support charities? If so, layering in charitable planning with your equity compensation plan can help to reduce taxes and maximize the charitable impact of your gifts.

A well-designed equity compensation strategy can minimize the emotional rollercoaster of decision-making when the stock price is most volatile. Remember to keep the end in mind as you design your stock compensation strategy. The combination of your goals and strategies have the power to change your life.

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Henry E. Zapisek
Cetera Advisor Networks
San Diego, California

The number-one action 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 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.

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Richard Friedman
Formerly with Ayco (now retired)
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 for company stock holdings or stock unit exposure should continue to focus on traditional tax-planning and asset-diversification concepts. Individual planning priorities may be based on your position at the company (key executive, salaried employee, consultant or director) and the amount of compensation payable in stock. With more long-term incentive (LTI) 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. Tax-law changes and the elimination of IRC §162(m), subject to a grandfathering provision, could affect awards this year, as well. Here are some issues to consider.

Year-end planning for company stock holdings or stock unit exposure should continue to focus on traditional tax-planning and asset-diversification concepts.

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 2020 or 2021, 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 (in shares or in cash). 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 2020 or 2021 due to adjustments in how the AMT is now calculated.

Deferral of RSUs or other stock-based compensation. This could be a tax-savings planning tool, it but comes with some risk. If your employer allows you to defer RSUs, performance share units (PSUs), 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—which typically is in the 4th quarter. 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 for current-year deferrals.

401(k) and ESPP planning. Many companies are now limiting or prohibiting elective deferrals into a company stock account. 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.

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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.

January 1 is the time to exercise incentive stock options (ISOs). Incentive stock options 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 full 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 drop during the year after exercise as they waited for their shares to go long-term. Without AMT liability, an ISO stock decline 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.

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