Year-End Planning For Stock Options, Restricted Stock, And ESPPs: 6 Items For Your Checklist


Year-end financial and tax planning is especially important for the millions of employees in the … [+] United States who have stock compensation


When the Santa hats, holiday lights, and Christmas movies come on, it’s time for year-end financial and tax planning. This is especially crucial for the millions of employees in the United States who have stock compensation such as stock options and restricted stock units (RSUs), participate in an employee stock purchase plan (ESPP), and/or have holdings of company shares.

To help keep the season merry and bright, recently held a webinar on year-end planning that I moderated with a panel of three financial and tax advisors who have expertise in stock compensation. Some of their insights are summarized in the year-end checklist below.

1. Should You Plan For Tax-Law Changes By Congress?

The future of new tax legislation in Congress is not clear enough to provide definite direction for year-end planning, according to the webinar panelists. The version of the Build Back Better Act passed by the House of Representatives in November did not include some of the tax hikes previously on the table to raise ordinary income and capital gains rates and change the estate and gift tax.

But it does include other tax provisions to keep an eye on that could impact equity compensation or stock sales. For example, it seeks to allow SALT (property and state tax) itemized deductions up to $80,000 (currently limited to $10,000). This change would affect tax planning when you have incentive stock options (ISOs) and want to avoid the alternative minimum tax.

Another major proposal in the bill is a surtax of up to 8% on the very wealthy. For individuals, this provision would impose a surcharge of 5% for modified adjusted gross income (MAGI) of more than $10 million, plus an additional 3% on MAGI over $25 million. This creates the equivalent of a top long-term capital gains rate of 28.8% or 31.8% that would apply to stock sales.

The bill also seeks to limit the qualified small business stock (QSBS) income exclusion to 50% for sales after September 13, 2021, for individuals with adjusted gross income of at least $400,000 and for all trusts and estates. This is a special tax benefit when you have stock compensation, founder’s stock, or investments in a private company and have held the shares at least five years, plus meet other requirements. The QSBS exclusion has been 100% for QSBS up to $10 million over the past several years.

“If this goes through, it’s basically going to negate any benefits of qualified small business stock,” lamented webinar panelist Chun Wong, Managing Partner of the CPA and accounting firm Safe Harbor LLP in San Francisco. He explained that a 50% exclusion would raise problems with the alternative minimum tax (AMT), depending on when the stock was acquired.

However, the future of the bill is too uncertain to be a factor in year-end tax planning. “The legislation currently in Congress is out of your control,” asserted Ally-Jane (AJ) Ayers, a CFP, CEP, and Enrolled Agent who co-founded the financial-planning firm Brooklyn FI in New York. “There’s so much we don’t know that at this point in the year, the best you can do is make a goals-based decision or a risk-based decision. We shouldn’t make tax decisions about what may or may not happen in Congress this year. The best thing to do is to make decisions about what your family needs for liquidity and financial independence.”

2. Income-Shifting And Multi-Year Planning

Multi-year planning is especially valuable with equity compensation, given the spikes of income that can occur with option exercises, the vesting of restricted stock/RSUs, or company stock sales. In general, you want to keep your yearly income under the thresholds for higher taxes and try to recognize extra income in the year when your income and tax rates will be lower.

Be aware of the 2021 and 2022 thresholds for higher tax rates on compensation income and capital gains, the phaseouts for various tax credits, and the Medicare surtax on investment income. The table below, from, presents key income thresholds in 2021 that affect your tax rates.

Key income thresholds in 2021 that affect tax rates

“The primary place where I see multi-year planning in my practice is for employees who have ownership guidelines as part of their employment contract and use RSU vestings and other ways to acquire the stock to meet them,” observed webinar panelist John Barringer, a CFP and the Managing Partner of Executive Wealth Planning in Denver. “Spreading out stock option exercises over a number of years to increase their stock ownership can smooth out the tax consequences.”

“Where we see multi-year planning the most is for clients who are going to make a big life change,” said AJ Ayers of Brooklyn FI. “For example, if they’re planning to switch jobs or add/remove a spouse from the tax return, those are opportunities for very large income swings. If we have a CMO at a company that just went public making $350,000 a year and they want to take a sabbatical next year, perhaps we can shift NQSO exercises into next year when we are nearly certain their tax rate will be lower.”

However, the advisors warn against making taxes the only reason for taking year-end action on stock comp. “I have to remind clients year after year to not let tax considerations be the primary driver of exercise timing,” explained John Barringer. “That being said, when you have options that are deep in the money or close to expiration, if you squeeze out a little bit of exercise now and still stay in the same tax bracket, that’s probably a good plan. If you run the risk of exercising in the next year, bear in mind that the differential in tax brackets could easily be erased by a couple of bad weeks of market behavior. Down markets don’t care about your tax treatment.”

“I would put need to diversify first,” added AJ Ayers. “As opposed to what the client thinks the stock is going to do, we ask what are the client’s goals? How quickly do they want to reach financial independence or retirement, and how does that impact our multi-year strategy to diversify?”

3. Withholding May Not Cover Taxes Owed

The flat supplemental wage rate for federal income tax withholding on stock compensation is based on the seven federal income-tax brackets. For amounts over $1 million, it is linked to the highest rate (37%). For amounts up to $1 million, it is linked to the third rate (22%), which is relatively low for most people with equity comp. Often those employees are underwithheld.

In fact, the 22% rate of withholding typically does not cover the actual taxes you will owe on the additional taxable income from your exercise of nonqualified stock options or vesting of restricted stock/RSUs. You must therefore know the tax bracket for your total income and assess the need to (1) put money aside to cover the taxes, (2) pay estimated taxes, or (3) revise your W-4 for the remainder of the year to increase salary withholding. Plus, with ISOs, while you have no withholding at exercise or sale, you will still owe taxes for the income triggered.

“My favorite way to handle this would be to just make changes in the W-4 and withhold extra every other paycheck,” said AJ Ayers. “Unfortunately, with the size of RSU vests, typically that’s not possible. They would have to withhold their entire paycheck and then some. So we find that making quarterly estimated tax payments is the best way to handle this.”

“We set our clients up with protective estimates,” noted Chun Wong. “If there is an event where the client has to pay more, such as at the end of the year, we’ll make an adjustment on what has to be paid on an estimate or W-2 withholding.”

4. Incentive Stock Options

Thinking about exercising incentive stock options (ISOs) before the end of the year and then holding the stock? While you must hold ISO shares for more than one year from exercise and two years from grant to get their beneficial tax treatment, you need to understand that the ISO exercise-and-hold beyond the year of exercise can also expose you to the alternative minimum tax (AMT). If the stock price falls significantly, you could be stuck with a big AMT bill on paper gains that is greater than the actual total value of the shares.

Be sure that you and your tax advisor first prepare an AMT projection to determine your AMT crossover point and see whether a tax benefit may arise from waiting until January of the following year. Next year the exercise may not trigger the AMT. Exercising ISOs at year-start can be a wiser move anyway. You then have all year to see how the stock performs and decide whether to hold the ISO shares beyond the year of exercise or sell before year-end to avoid the AMT in what is called a disqualifying disposition.

“We often will disqualify some ISOs to provide liquidity,” explained AJ Ayers. “As we disqualify ISOs, we bring up ordinary income. That creates a bigger budget to exercise additional ISOs and not generate any more AMT in the future.”

5. Year-End Planning For Pre-IPO And IPO Companies

Special year-end considerations arise for employees with stock comp at newly public companies or those announcing an upcoming IPO. You need to know:

  • when the post-IPO lockup or other stock resale restrictions will end
  • whether you have any ability to sell some shares sooner
  • when shares will be delivered with double-trigger vesting RSUs

“One of the first things I tell my clients is to find out who the stock plan administrator is,” said AJ Ayers. “For clients who are experiencing an IPO, a direct listing, or a SPAC, having a direct line to someone who actually knows what’s going on will be the most valuable thing. Often companies are just not prepared to give these answers.”

AJ went on to offer some key points for clients at private companies who are expecting the company to go public soon.

  • Be wary of companies going public in Q4 of the current tax year. If you have an RSU grant, it may start vesting and will therefore increase ordinary income.
  • If you are going to be subject to blackout periods when the company prohibits sales to prevent insider trading, you may want to break the general wisdom of not exercising ISOs late in the year so you can start the one-year holding clock for a 2022 qualifying disposition and attempt to catch the Q4 trading window.
  • Be prepared to run a few different tax-planning scenarios to show how disqualifying ISOs can lead to a favorable outcome if you are in danger of paying a large amount of AMT.
  • The year before an IPO can be a fantastic opportunity for charitable donations, especially if you made ISO disqualifying dispositions that bump up your income.

6. Confirm Dates For Exercise And Vesting: 2021 Or 2022?

This last point here may seem little, but it can have big implications. Stock option income recognized on an exercise date in 2021, and restricted stock/RSU income with a vesting date in 2021, will be included in 2021 taxable income and on your W-2 for 2021. It does not matter that the company won’t send the taxes to the IRS until early January.

However, January 1 of 2022 falls on a Saturday, meaning that for many companies December 31 (i.e. Friday) is a holiday. Therefore, you will want to confirm how your company handles exercises that occur on or vestings scheduled for December 31, 2021. Will the transaction revert to the previous business day or the next business day? You also want to confirm whether December 30 (Thursday) or December 31 (Friday) is considered by your company and your stock plan to be the last business day of 2021 (and if it’s Dec. 31 whether up to a certain time).

Further Resources

The year-end planning section on also has articles by experts and FAQs on these topics and more. The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. In addition to what’s covered in this article, the advisors presented case studies highlighting many of the planning issues they focus on at year-end for public and private company clients.

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