You’ve got your tax return filed. You’ve gotten a refund or found out how much you owe. I know you’re ready to file all that away and not think about it for another year.
Before you close that folder, let’s look at a few things you can do now that might make this process easier (and if you owed money this year, less surprising) next year.
You’ve Been Granted Restricted Stock
If you’ve been granted restricted company stock and you’ve been waiting to do something with it because of capital gains, it might be time to take a hard look at the activity of those investments. I recently had a client who received company stock that suffered three years of negative earnings – but she thought she still needed to hold onto it because of capital gains. With three years of negative earnings, she didn’t have any gains. If you have questions about your company stock and whether or not they’re working for you, it’s time to talk to your advisor.
Here are some other things to take into consideration:
- Look into an 83(b) election: Another strategy is using an 83(b) election when you receive the restricted stock grant. An 83(b) election (when made within 30 days of the stock award) allows you to pay taxes on the stock grant upfront as opposed to when the shares vest. The advantage of this election is that you will only be taxed on the fair market value of the shares when you receive them, which may be lower than when they vest (thus reducing your tax liability). However, if the stock price rises in the future, then you will not have any more taxes to pay when the shares vest. However, when the shares are sold, if there is a gain over the amount taxes at the time of the 83(b) election, taxes (i.e., long-term or short-term capital gain depending on the holding period) will be due. Not all employers offer this option, so you will need to check in with your HR department for availability.
- Consider tax-loss harvesting: A tax-loss harvesting strategy can help offset your tax liability. If some of your shares have a gain and others a loss, consider selling shares out of two or more lots to net out your gains while reducing your concentration in your employer stock.
- Sell one year after vesting where no 83(b) election was made: A final strategy to consider is selling the shares one year after vesting. When your restricted stock vests, you are immediately taxed at ordinary income rates on the value of the shares on the vesting date. If your company is doing well, there will hopefully be some additional gain in the share price since the vesting date. In order to pay the long-term capital gains rate on the gains, you will need to hold onto the shares for at least one year from the vest date.
- Consult a tax professional: Ultimately, the best way to reduce your tax liability is to consult a professional. An experienced tax professional and your financial planner can help you better understand the nuances of restricted stock grants and decided on the best strategies to optimize your tax position. Additionally, they can provide strategies that are designed to reduce taxes and increase the overall value of your compensation package.
Don’t Wait to Make IRA Contributions
I’ve seen many clients wait to make IRA contributions at the last minute when they’re about to file their taxes generally April 15th, not extended due dates. If there is any problem with the paperwork, mail or bank transfer, your contribution may not make it in time. Also, the long-term goal for an investment is for the market to go up and the investment to increase in value. While investment gains are not guaranteed, the longer your money is invested, the more potential it has to grow.
Donate appreciated stock that will be taxed as long-term capital gain to your favorite charity instead of cash
If charitable giving is important to you, consider donating appreciated stock instead of cash. The charity must be a qualified type of charity – meaning you usually get a tax write-off for the donation. In addition, for certain charities, the stock may need to be traded on an exchange. If you give $100 worth of stock that you paid $60 for, you generally get to write off the full $100 without selling the stock and realizing $40 of capital gain that you then have to pay taxes on. Because the charity is a non-profit, the charity can then sell the stock for the $100 and not pay taxes on the gain either. It’s a win for you and a win for the charity. Pro tip – after the contribution is made, consider paying yourself back by reinvesting $100 back into your portfolio. The goal of this strategy is to increase your cost basis in your investments so that you will pay less in taxes in the long run while satisfying your charitable desires. It is also a good way to get some of the gains out of your portfolio, making rebalancing easier.
Again, I know that tax season can be stressful. However, there are some simple things you can do now (or at least talk to your tax and financial professional about) that could not only make filing in the future easier but also less surprising. No one likes receiving those tax bills – taking action now could prevent you from having that gut-check moment.