Year-end is always a key time for financial and tax planning with employee equity compensation and company stock. The results of the 2024 US election—Donald Trump’s second presidency and a Republican majority in Congress—have added some clarity on taxes but have also introduced areas of uncertainty. The longer-term outlook for the tax laws and the stock market remain key factors in year-end planning for employee stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), and related holdings of company shares.
Tax-Planning Outlook
The Republican-driven Tax Cuts & Jobs Act (TCJA) will expire after 2025 unless it is extended or made permanent. Before the election, when the White House and Congress were considered a tossup, the tax landscape after 2025 was anyone’s guess. Wildly different outcomes were possible, from tax hikes to tax cuts. The Republican sweep of the White House and Congress has removed at least some of that uncertainty.
“The extension of the Tax Cuts & Jobs Act beyond 2025 seems to be locked in,” believes John Barringer, Managing Partner of Executive Wealth Planning in Denver. He was one of three experienced financial advisors who spoke during a recent myStockOptions.com webinar on year-end planning that I moderated.
While it is tempting to think that the incoming Republican White House and Congress will not just extend the TCJA but actually make it permanent, all three of the webinar’s advisor panelists expressed doubt about that extreme. Even the webinar audience of advisors seemed to agree. In a poll conducted live during the webinar, about 70% of the attendees indicated that they believe the TCJA will be extended but not made permanent.
Nevertheless, the advisors who spoke during the webinar are confident enough about an extension to reallocate their planning focus to other areas. “A lot of our planning was built around the TCJA expiring,” said webinar panelist John Owens, Managing Partner of Brooklyn FI in New York. “In light of the election, multiyear planning at year-end has shifted. We may have a broader timeframe to think about how we space out ordinary income. It means that state taxes actually matter more, now that federal tax rates will stay similar to what they are.”
Plenty of other open tax-law issues remain that could affect planning for equity compensation. Some, for example, involve the calculation of the alternative minimum tax (AMT), a big concern for anyone with incentive stock options (ISOs).
In 2018, the TCJA increased the AMT income exemption amounts and substantially raised the income point where the exemptions start to phase out. Those moves made it less likely for employees with ISOs to trigger the AMT after they exercise the options and hold the stock. The spread at exercise is part of the AMT income calculation when the shares are held beyond the calendar year of exercise.
However, policy discussions in Congress suggest that the $10,000 cap on itemized deductions for state and local tax (SALT) may be increased or eliminated. The amount of the SALT deduction is added back as part of the AMT income calculation. Moreover, to pay for a higher SALT cap, Congress might then have to reconfigure the AMT income exemptions and phaseouts themselves. These potential changes could bring the risk of the AMT back into play for more people with ISOs.
“We’re looking at a lot of ISO exercises right now for either this year or next year,” said webinar panelist Rebecca Conner, the founder of SeedSafe Financial in Austin, Texas. “If that SALT cap is eliminated, my California clients are going to have a very large add-back in their AMT calculation.”
Other potential modifications to tax rules could be engineered by the Trump White House without recourse to Congress. For example, near the end of his first White House term, President Trump sought a way to require the IRS to issue rules that would index for inflation the all-important cost basis used to calculate capital gains and losses when shares are sold. Indexing capital gains for inflation has long been a GOP goal and seems likely to be attempted again.
Stock-Market Outlook
One area of increasing uncertainty is the direction of stock prices for employees with equity compensation and holdings of company shares. Amid the promise of tariffs, deregulation, immigration restrictions, increased domestic energy production, and other factors, how will the second Trump administration affect your company’s stock price and therefore your equity comp planning?
“That probably depends on what industry you’re in,” explains John Barringer, a seasoned veteran of many market eras and economic cycles.
“If you work for a company in the energy or financial sector, the next four years will probably be good ones for you,” he noted, citing President-Elect Trump’s stated ambition to ramp up domestic energy production. However, John observed, Trump’s well-known policies targeting immigration may be bad news for some sectors. “If you work for a company that relies on immigrant labor, like hospitality, agriculture, homebuilding, meatpacking, or education, you may find it difficult to meet your performance goals.”
The ways in which the Trump tariffs play out will also be a factor, especially in technology sectors. “If you’re a tech worker at an established company that relies on Asian manufacturing, sales may be a little slower,” John warned.
Overall, however, short-term economic indicators seem to offer a salubrious outlook for company stock performance. “The market is acting like it believes growth with higher inflation will be a good thing,” John said. “The US dollar is stronger because the US is probably going to continue to outperform the rest of the world. Cyclical industries, like financials, are leading the way.”
John believes that optimism about deregulation could translate into an uptick for mergers, acquisitions, and initial public offerings (IPOs). This would be good news for employees in late-stage pre-IPO companies who have seen the postponement of the M&A or IPO liquidity events that they need to cash in on their equity awards. “If you’re working at a startup, there may be a light at the end of the tunnel for your delayed IPO,” he said.
John Owens of Brooklyn FI thinks the potential for more IPOs is strong enough to make this a good time to evaluate exercising ISOs in private companies. You would then hold the ISO shares long enough to get the best tax treatment at sale.
Year-End Equity Comp Planning Moves In 2024
The election has not changed the immediate environment for year-end financial planning in 2024, with advisors recommending many of the standard strategies that apply every year. For more on those, see my Forbes.com article Year-End Planning For Stock Options And RSUs: Advisors’ Tips In Uneven Markets.
One major strategy involves multiyear planning and income-shifting if you expect changes such as a spike in income (e.g. from equity compensation, a raise, or a big cash bonus) or a shift in your job status. If you anticipate that you will be in a higher tax bracket in 2025, consider ways to accelerate income into 2024 or spread out exercising over two years. For example, you may want to exercise nonqualified stock options (NQSOs) or sell company stock from an RSU vesting with large capital gains.
“Do we have some ‘bracket space’ within which we could exercise some options and stay in our marginal bracket to meet our diversification goals?” is something that John Barringer asks his clients. John Owens agrees. “Consider bracket management if you’re likely to see an ordinary income tax hike, especially with NQSOs,” he said during the myStockOptions webinar.
For clients with incentive stock options, Rebecca Conner routinely conducts a review of ISO exercises made earlier in the year to assess the risk of triggering the AMT on shares held beyond the calendar year of exercise. “Evaluate whether to sell them in the calendar year and exercise other ISOs.” She weighs whether clients should “lean into” exercising other ISOs, especially if the company’s stock price has been volatile.
John Barringer takes his clients through stock option grants that may be nearing their expiration date. “Old grants or ones that will expire soon should still be evaluated for exercise. How are we doing on our other goals, especially retirement? Can an equity exercise further fund it?”
Further Resources
The webinar in which the panelists spoke is available to stream on demand. The website myStockOptions.com provides education and guidance on year-end financial and tax planning for stock options, RSUs, ESPPs, and company shares in its section Year-End Planning.