As 2024 comes to a close, tax and financial planning take on renewed importance, particularly following the outcome of the recent election. The reelection of Donald Trump and a Republican-controlled Congress have brought both clarity and new uncertainties to tax laws and financial strategies for employees with equity compensation. Below, we summarize the key considerations and strategies for the year ahead.
Tax-Planning Outlook: The Future of the TCJA
The Republican-driven Tax Cuts and Jobs Act (TCJA) is set to expire after 2025 unless extended or made permanent. With a Republican majority in Congress, an extension of the TCJA appears likely, though its permanence remains uncertain.
This potential extension has shifted year-end planning strategies. For instance:
Multi-Year Planning: Emphasis on income-shifting strategies, such as accelerating income into 2024 or spreading stock option exercises over multiple years to optimize tax brackets.
State Taxes Matter More: With federal tax rates likely to remain stable, greater attention is being paid to state-level tax planning.
Potential SALT Cap Changes: Discussions in Congress about raising or eliminating the $10,000 cap on state and local tax (SALT) deductions could significantly impact planning, particularly for clients in high-tax states like California.
For incentive stock options (ISOs), this environment highlights the importance of evaluating the potential alternative minimum tax (AMT) implications. We recommend proactive planning, including reviewing past ISO exercises and considering whether to sell ISO shares before year-end to minimize AMT exposure.
Stock Market and Equity Compensation: What Lies Ahead?
The direction of stock prices remains uncertain under the second Trump administration, with outcomes likely to vary by industry. Key considerations include:
Sector-Specific Trends: Employees in energy or financial sectors may benefit from policies like deregulation and increased domestic energy production. Conversely, sectors relying on immigrant labor or international supply chains, such as agriculture, hospitality, and tech, may face challenges.
IPOs and M&A Activity: Optimism about deregulation could spur an increase in mergers, acquisitions, and initial public offerings (IPOs). This is good news for employees holding equity in late-stage private companies, where liquidity events have been delayed.
Given these dynamics, now is an opportune time to assess stock option strategies, particularly for private companies nearing IPOs or liquidity events.
Year-End Planning Strategies
Despite election-driven changes, many traditional year-end equity compensation strategies still apply:
Bracket Management: Review your income projections and consider exercising nonqualified stock options (NQSOs) or selling shares to diversify holdings while remaining within your current tax bracket.
ISO Reviews: If you’ve exercised ISOs this year, evaluate whether to sell those shares before year-end to avoid triggering AMT or whether to exercise additional ISOs for long-term gains.
Expiring Stock Options: Ensure that stock options nearing expiration are assessed for exercise to avoid losing their value.
As always, it’s critical to align these strategies with your broader financial and retirement goals.
Looking Ahead
The evolving tax landscape and market environment under score the importance of personalized planning. We recommend working closely with us to craft strategies tailored to your specific circumstances.
If you’d like to explore these strategies further or review your equity compensation plan, we’re here to help. We wish you and your loved ones a joyful holiday season.
