🎄 Here’s why you should be doing tax planning this holiday season
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
I can’t believe it, but the holidays are here and 2023 is coming to a wrap. For myself, December is a time to spend with family and friends, reflect back on 2023, and relax in preparation for the year ahead. It’s been another up and down year for all of us in startup land, but we all should take some time to look back and celebrate our accomplishments.
Another important December activity on my checklist? Tax planning.
I know… you're thinking that tax season isn’t for another few months, which is true. And taxes aren't anyone's idea of bringing “holiday cheer.” But tax planning never truly stops and December is the last chance to make many critical decisions for 2023.
You never want to be scrambling heading into tax season, trust me. I used to work at PwC before Secfi and I’ve got some horror stories. So make sure you get buttoned up and get those tax planning strategies in line this holiday season.
Here’s a few things our Secfi Wealth team is working through with our startup clients that may also apply to your situation.
Obligatory disclaimer that none of the below should be considered tax advice and you should discuss with your own advisors.
If you’re reading this post, chances are that you own either Incentive Stock Options (ISOs) or Non-qualified Stock Options (NSOs), or both. Given the down market and relatively lower 409A valuations, if you’re bullish on your company’s future it may be wise to exercise some stock options prior to year-end as tax bills may be lower with a lower 409A valuation.
Those with ISOs should especially consider exercising their options. Every year most taxpayers will have a gap between their Standard Tax and their Alternative Minimum Tax (AMT). This means that you’ll be able to exercise ISOs completely tax free up to the point where your AMT meets your Standard Tax. Depending on your strike price, 409A price, and personal financial situation, this could be a great way to start on that exercise plan — tax free.
If you’ve exercised ISOs in prior years and paid the AMT, you should also factor in the possible recovery of that AMT credit when you file your taxes. Many of you will be able to get some of that AMT you paid in prior years back if you do not hit the AMT this year. It’ll be important to run a projection of your Standard Tax alongside your AMT for 2023, and see how your financial goals fit in as there are trade-offs between exercising more ISOs tax-free and utilizing the AMT credit.
Perhaps the most tedious, but one of the most valuable strategies is planning around your capital gains and losses of your investments. Every December, I map out my current realized gain and loss positions of all my investments to gauge where I am at. This includes my public stock portfolio, my crypto positions, and my private stock positions. Giving me a read on where my capital gains or losses net out with a month to go before year-end allows me to make additional sales to optimize.
If you are at a net capital gain for the year, you may want to “tax loss harvest” which in simple terms is selling some of your loss positions to lower or eliminate those capital gains. You can reduce your 2023 tax bill significantly, eliminate it, or even recover some taxes. The tax code allows you to deduct $3,000 in capital losses against ordinary income.
On the flip side, if you have capital losses this year, or if you have capital loss carryovers from prior years, you may want to use this as an opportunity to exit some of your gain positions and rebalance your portfolio. You may be able to sell those investments without paying taxes in 2023.
Of course, taxes are just one piece to the equation and you must factor in the investment decision as well. But choosing to sell positions before or after the new year may make a significant difference in your 2023 taxes.
You can do good in the world by making a charitable donation and lower your 2023 tax bill. In fact, it’s one of the more generous tax planning strategies.
In general, you can deduct up to 60% of your adjusted gross income if you donate to a qualifying organization. Generally speaking, qualified organizations are non-profits such as the Red Cross, religious organizations, museums, etc. The easiest way to find out if it qualifies for a deduction is to ask the organization prior to making a donation.
Those of you with highly appreciated stock may want to consider donating those shares to a donor-advised fund. The tax benefits of a donor-advised fund can be gigantic. First, you do not pay any capital gains on the appreciation of that stock so all those built-in gains never make it to your tax return. Second, you can take a charitable deduction for the entire fair market value of the shares.
After putting the shares in a donor advised fund, you do not pay any taxes on further appreciation. On top of all this, you can dictate when and where those donations are made to your favorite charities. If you’re interested in setting up a donor advised fund, our friends at Daffy have created an automated and tech forward solution that we highly recommend.