🌼 Spring into action: Tax tips you may miss this year
Tim’s a CFP® at Secfi. He specializes in helping tech professionals navigate the complexities of equity compensation and integrate it into their holistic financial plans.
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Tim’s a CFP® at Secfi. He specializes in helping tech professionals navigate the complexities of equity compensation and integrate it into their holistic financial plans.
April showers bring more than just spring flowers…Hello tax season! With the tax due date just around the corner (April 18th this year, though some states, including California, have until October 16 due to weather disasters), a lot of you may be thinking: “Is that amount right? Geez, I owe a lot of taxes.”
Not to burst your bubble, but there are no “magic bullets” when it comes to taxes (though Vieje previously shared how tax law isn’t always so clear). But that doesn’t mean you can’t have a good tax strategy.
Your 2022 taxes are already set in stone but it’s never too early to start planning for next year. So, I wanted to share some unique tax insights — not the generic “max out your 401K!” ones you typically read about.
If you’ve ever exercised incentive stock options (ISOs) you’re probably painfully aware of the Alternative Minimum Tax. The upside of paying AMT is that you can likely claw it back later — it’s basically a prepayment of taxes for the future.
In years where you don’t incur AMT, you can start recouping it. You may not be able to recoup it all back in a single year, but if you paid it last year or are planning to exercise any options this year, you should pay attention when getting ready to file taxes.
Do note that the higher your income is in 2023, the more AMT credits you’ll be able to recover. Here’s an overview of how to claim AMT credits:
This is meant to be general tax advice. Please consult your tax advisor regarding your particular circumstance. My team and I regularly help startup employees plan their taxes. Learn more about our advisory services here.
With so many in our community being laid off and seed and early-stage funding rounds easier to come by than late-stage funding rounds, the combination may be ripe for many to finally take the plunge to build their own startups. If history repeats itself, the next Airbnb or Slack could be founded (or was already started) during the current downturn.
The last economic recession is where many of today’s big tech companies found their footing and Amazon actually went public at the height of the Dot-Com Bubble. The upside of the downturn is that innovation doesn’t stop during recessions — if anything, they may feed it.
For those of you that are recent founders, are eager to launch your own business, or if you recently joined an early-stage startup, you should know about the Qualified Small Business Stock (QSBS). The IRS created Section 1202 to stimulate small business development and to incentivize people to take the risk of launching new, innovative businesses.
It’s likely you’ve heard of QSBS, but its benefits are limited to those that join a company when it’s still fairly small, which is why you want to take advantage of it when you can. The incentive allows stockholders to claim a minimum of $10 million in federal capital gains tax exclusion when selling their qualified small business stock at least five years after exercising it.
There are some other restrictions but, generally, QSBS is applicable to most tech startups. For more details, here’s a QSBS cheat sheet to reference. While the tax incentives can be enormous, the true power of QSBS lies within proper planning — many aspects of which I often see overlooked. Those include:
📉 Take advantage of a lower income year
Each year isn’t always created equal when it comes to income. Maybe you left your job to take some time off, or maybe you were laid off. While the latter is an obviously tough position to be in, and it can be hard to look at things objectively, a job transition is a time to look at your financial picture and see if you have any potential opportunities.
If you do find yourself transitioning between jobs or careers this year, and expect that your income will be lower, you should consider the following:
We’re currently in a historically low tax-rate environment. If no new legislation is passed between now and the end of 2025, the current income tax rates and brackets that were enacted through the Tax Cut and Jobs Act (TCJA) of 2017 are set to sunset — meaning that tax rates will increase and tax brackets will be compressed.
Here are a few things you should consider over the next few years:
Another tax strategy you should consider is also a way to give back to your community. If you already do give back, you may not be getting the full tax benefit you could, especially if you don’t itemize your tax deductions, which many people don’t. If you do, you can “bunch” charitable donations into a single year for a bigger tax deduction: For 2023 it’s $13,850 for single filers and $27,700 for joint filers.
A great way to take advantage of this is through a donor-advised fund (DAF), which is kind of like a 401K but for charities. To make this easier for our clients in the startup community, we recently partnered with Daffy because they allow you to contribute cash as well as stock, crypto, or ETF to your DAF and receive a tax deduction in the year you contribute.
But, here’s where DAF’s can be incredibly powerful: If you donate securities that have been held for at least one year, you’re eligible to receive a tax deduction for the Fair Market Value of the shares you contributed. Not only does this mean you can avoid capital gains tax, a DAF allows you to distribute these funds to your favorite charities over multiple years.
For example, if you typically donate $3,000 a year to the American Red Cross, you may not be getting any tax benefits. But, if you set up a DAF and “pre-fund” three years of donations ($9,000 in total), you can “bunch” that donation (which may be through shares of public stock) into the same calendar year. Now, you can deduct all $9K for the 2023 tax year but still distribute the donation to the Red Cross over the next three years.
There are two types of RSUs: single trigger and double trigger. Single-trigger RSUs are subject to a time-based vesting schedule like most stock options (i.e. four years), and are common at public companies. Double-trigger RSUs are common at late-stage, private companies which are still subject to the same time-based vesting schedule AND a “change of control” trigger, like an IPO or an acquisition. The reason for the second trigger is so that employees at private companies don’t have a tax liability without a way to sell their shares (Vieje covered why Stripe is trying to solve this issue with their $7B fundraise).
Let’s say you had RSUs vest in 2022. That income will appear in your W-2, in Box 1, since they are taxed as income. If you sold any RSUs in 2022, though, the sale of those shares will appear on Form 1099-B. Since the vesting and sale of RSUs are reported on two separate tax forms, it’s important to make sure you’re not getting double-taxed on that income!
You should check form 1099-B to make sure that the cost basis for when you acquired those RSUs (i.e. the value of the shares on the date of vesting), is recorded correctly. A common oversight is that the 1099-B form reports your cost basis as “0,” and the full proceeds get taxed as a capital gain AND it’s already been taxed on your W-2.
One thing to note is that RSUs are automatically withheld at 22% for Federal tax purposes for most people. If your effective tax rate is higher than 22%, because you’re a high earner, you’ll likely have a tax bill to make up for underwithholding. If that happens, or you think you’ll be subject to a higher tax rate, check with your employer to see if they’ll allow you to elect a higher withholding amount on supplemental income for 2023. Or you can also make quarterly estimated tax payments to avoid this issue.
If you’ve made it this far, you can see why I said upfront that there aren’t any magic tricks when it comes to taxes. But, it's also not simple stuff, and you can see why it's easy to overlook or miss things.
That's why it's so important to have a partner that understands your financial situation and, for most of you, how private equity works.
I’m no magician, but a good financial advisor helps you cut through the noise, help you understand the best strategies for your situation, and implements the proper actions to put you in the best position — and save on taxes where you can. Learn more about the services my team and I offer here.
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