Year-End Planning Checklist for Your Equity Compensation

Dec 06, 2022

Guest Blog by Beata Dragovics, Founder, Freedom Trail Financial

Year-end financial planning for your stock compensation can be daunting, especially when we are experiencing volatile markets. 2022 was a year where inflation, interest rates and strong market volatility have been dominating headlines. Will this all change for the better in 2023? This is a question we can’t answer, and at the same time, we know markets are efficient and eventually there will be a recovery.

Considering the uncertainty, here are some items you should review when it comes to your year-end equity compensation strategy.

1. Revisit your financial goals and make them the primary base for decision making. We tend to consider taxes as a primary reason for exercising options or selling company stock. Reverse that and think about your short- and long-term financial goals. Will you need to earmark company stock towards a financial goal in 2023 and you know your income might be higher due to large RSU vesting? If the answer is yes, consider exercising options in 2022 to shift income to current year.

2. Create a multi-year strategy for your various equity grants. This can help you mitigate higher taxes whenever possible and maximize the value of your equity grants in the long run. Review vesting schedules for your RSUs and restricted stock if any and do the same for your stock options. Do you believe you will reach your performance targets and you have large amount of performance shares vesting in 2023? Answering these questions can estimate income and help you make decisions on exercising options at year-end or leaving it to the new year.

3. Tax-loss harvesting is a common strategy in a bear market. You can sell company stock at a loss and buy it back after 30 days to avoid the wash sale rule. Realizing capital losses in 2022 can be beneficial in future years as carry-over losses can help lower tax liability on capital gains.

4. Changing jobs at the beginning of the year can be expected by now for some. If that is the case for you, I recommend making some preparations before year-end. Review what grants will vest before you leave the company; let that be RSUs or PSUs. Will you have to exercise options once your employment is terminated? You will have 90 days to do that in most cases. Estimating your income for 2023 might lead you to accelerate income in 2022 by exercising non-qualified stock options or selling company stock with low-cost basis.

5. Donating company stock instead of cash can be a beneficial strategy for those with charitable intentions. This can be further valuable if you own highly appreciated company stock; donating the stock to charity will provide you with a tax deduction for the full market value while giving back to a cause dear to your heart.

6. Incentive stock option (ISO) planning at year-end has heightened importance. ISOs defer from non-qualified stock options (NQSOs) based on their tax treatment. At exercise, one doesn’t pay ordinary income tax (As is the case for NQSOs.), but the spread between the grant price and the fair market value of the stock is subject to the alternative minimum tax (AMT). To qualify for this preferential tax treatment, however, you must hold the stock for two years from the grant date and one year from the exercise date. If you sell your shares early, the sale will be treated as a disqualifying disposition, the options become non-qualified, and taxes will be due. If you adhere to the holding period, any capital gains above the grant price are also subject to long-term capital gains taxes.

What to look out for at year-end with your ISO grants? Here are a few ideas:

  • Exercising ISOs at the beginning of the year is common as it starts the holding period for long term capital gain treatment. If you exercised ISO shares earlier in 2022, you could now decide whether you should sell the stock before year-end and eliminate your AMT liability. Why would you do this? There is a great chance, your company’s stock price was higher at the beginning of 2022 than at the end of the year, therefore, your AMT liability is potentially high. In case your company’s stock price dropped, you can sell the shares, allowing for a disqualifying disposition to happen and pay ordinary income taxes instead.
  • The current bear market and overall stock price decline can present an opportunity as well so use this to your advantage. You are most probably able to exercise more ISOs without triggering AMT.

7. The tax implications and strategies around your equity compensation are complex, therefore always consult your tax accountant and financial advisor when deciding the best strategy for your own situation.

About the Author

Beata Dragovics is the founder of Freedom Trail Financial, an independent wealth management firm. Freedom Trail Financial works with biotech, pharma and tech professionals, families, and women.

Beata works with clients to develop comprehensive and customized financial planning, investment management, and equity compensation solutions that are tailored to help achieve professional, financial, and personal goals. The firm specializes in helping clients with equity compensation strategies to maximize their company stock and option holdings as part of their extensive and holistic plan.

As the principal and a financial advisor at Freedom Trail Financial, Beata is a continuous resource to her clients in times of change. She helps clients think differently about their future, clarify their goals, and see how financial planning can be in alignment with their personal values and lives.

Beata is a CERTIFIED FINANCIAL PLANNER™ practitioner and earned her bachelor’s degree in business management from the Budapest Business School and her master’s degree in financial planning from the College for Financial Planning. She holds the FINRA Series 7 and 66 securities registrations.

See all MassBio News