Episode 69: Interest Rates Are Rising....Does That Mean You Should Adjust Your Bond Allocation?

Episode #49: How to Make Millions While Paying $0 In Federal Income Tax

A few weeks ago, The New York Times published an article that created controversy around President Trump’s tax returns. One of the most controversial claims of this article was that President Trump paid only $750 in federal income tax in the year that he won the election. In today’s episode, Grant dives into specific sections of the tax code that enabled President Trump to reduce his tax bill and how you can incorporate similar strategies in your tax planning.

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How are Incentive Stock Options (ISOs) Taxed?

How Are Incentive Stock Options Taxed?

Incentive stock options are a wonderful benefit to receive.  They’re often granted to executives of publicly traded companies and early stage employees of startups, in an effort to align their interests more closely with shareholders.  They’re also more complicated than their close cousins, non-qualified stock options thanks to certain tax advantages.  The timing of when your shares vest, when you exercise, and when & whether you sell the resulting shares determine how your options are taxed & whether these advantages will apply.  This post will cover the basics of incentive stock options, how they’re taxed, and a few points to consider if you’ve been granted them.

 

The Basics of Incentive Stock Options

Stock options give holders the right to buy or sell a certain security at a certain price for a certain period of time.  You can buy and sell stock options on thousands of publicly traded stocks through a typical brokerage account.  Incentive stock options are the same basic contract, where you’re given the right to buy a certain number of shares of your company for a specific dollar amount.  Here are a few basic terms you’ll need to know.

Strike Price: This is the price at which you have the right to purchase shares.  This is often discounted from the current market price.

Fair Market Value: Fair market value (FMV) reflects the value of a company’s shares at any given time.  This is easy to ascertain for large, publicly traded companies since their equity value is constantly being traded over exchanges.  FMV for a given day is simply the average of the high and low selling prices on a particular trading day.  For privately held businesses, FMV is typically determined by a formal appraisal or business valuation.

Vesting: Vesting is the concept of your options becoming “active”.  Often companies will issue stock options that vest over time.  This incentivizes employees to stick around and continue building the value of the company.  A common vesting schedule might be 25% over four years.  This means that if you’re issued 1,000 options, 250 will be available for you to exercise one year after the grant date.  Another 250 would vest after two years, and so on.  Another common schedule for ISOs is a three year cliff, where none of the options vest for the first three years.  Then when the three year date arrives, 100% vest.

Grant Date: This is the date the company gives you the options initially.  Vesting “clocks” start ticking on the grant date.

Expiration Date: This is the date the options expire.  Note that sometimes expiration is triggered upon resignation or termination of employment.  Usually you’ll have 90 days after leaving to exercise your options, but this isn’t always the case.

Bargain Element: The difference between the fair market value of the shares and your strike price is the bargain element.

Qualifying Disposition: If you sell ISO shares at least two years after the grant date and one year after exercising, it’s considered a qualifying disposition.  This comes with favorable tax advantages.

Disqualifying Disposition: Any sales of ISO shares that are not considered qualifying dispositions are considered disqualifying dispositions.  Disqualifying dispositions are taxed differently.

 

Example:

Let’s say that your employer gave you 1,000 incentive stock options three years ago that just vested.  The strike price (exercise price) is $10, and equity shares of your company currently trade over an exchange at $25.  The bargain element works out to $15 per share: $25 – $10.  Even though shares of your company might cost $25 on the open market, your ISOs give you the right to buy them for $10.  If you exercised your options and hung onto them for one year, you could then sell the shares in a qualifying disposition.  Exercising and immediately selling would be considered a disqualifying disposition.

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How Are Non-Qualified Stock Options (NSOs) Taxed?

How Are Non-Qualified Stock Options (NSOs) Taxed?

Non-qualified stock options (NSOs) are a very popular way to compensate employees at publicly traded companies, and a wonderful benefit to receive.  But the tax consequences, and how to handle them, can be confusing.

How you handle an NSO grant should depend on your personal financial situation: your objectives, your tax situation, your cash needs, the rest of your portfolio, etc.  Managing your NSOs thoughtfully can lead to a huge tax savings over time.  Managing them haphazardly can lead to an unwanted (and unneeded) bill to the IRS.

This post will cover how NSOs are taxed, and a few questions you should ask yourself before deciding how to handle them.

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Biden's Tax Plan

Reviewing the Biden Tax Plan

With the election in November creeping closer, the campaign season is now in full swing.  And the closer we get, the more details & campaign promises start to emerge from the candidates.

Biden’s tax plan has mostly flown under the radar in the national media thus far, thanks to the global pandemic.  But given that he has at least a 50/50 shot at winning, I thought it made sense to devote a post to what he has in mind if he does win the Presidency.  If elected, we could see some substantial changes to the tax code in the next few years.

Here’s the rundown.

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Don't Take Those RMDs This Year!

Don’t Take Those RMDs This Year!

As you may have heard, the CARES Act (aka the Coronavirus stimulus bill) created a holiday for mandatory distributions from retirement accounts in 2020.

So if you’re otherwise required to pull money from your IRA or 401(k) this year, you can skip it – penalty free.  This includes retirement accounts of your own AND those inherited from someone else.  Pretty neat, right?

But remember, the CARES Act wasn’t passed until March.  What if you’ve already taken a distribution?  Can you put it back?

The good news is yes, you can, as long as it’s done by August 31st.  Whereas this wasn’t initially the allowable, updated guidance from the IRS says that those of you who took RMDs in January or February can now replace them.

Read on for the details on how to put back your RMD if you’ve already taken one, and when you might still want to take a distribution if you haven’t already.

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A Quick Summary of Coronavirus Related Tax Opportunities

A Quick Summary of Coronavirus Related Tax Opportunities

It’s been quite a year so far.  Wildfires in Australia, an impeachment trial of Donald Trump, the death of Kobe Bryant, and the Coronavirus pandemic.  Oh yeah, and don’t forget that it’s an election year.

Given the roller-coaster year it’s not hard to miss some of the tax planning opportunities that have arisen from the Coronavirus and the resulting stimulus legislation.

To help make sure you don’t leave any planning opportunities on the table, this post will review the top Coronavirus related tax opportunities for individuals.

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How to Get Your PPP Loan Forgiven

How to Get Your PPP Loan Forgiven

We’re now about six weeks into the CARES Act and in round two of the Paycheck Protection Program.  The $310 billion allotted to the program in round two is beginning to dwindle, but has lasted longer than most bankers expected.

There could be another round of stimulus that replenishes the program over the next few months, of course.  There seems to be widespread effort in Washington to ensure that businesses that need PPP funds are able to get them.  Who knows whether that will eventually happen.

For many of the businesses the most pressing question is no longer how they can access the program & obtain funds to keep their operations going.  It’s what must I do to have this loan forgiven?  This post will cover what we know so far.

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My Top 5 Year End Tax Planning Tips

My Top 5 Year End Tax Planning Tips

Happy holidays!

It’s now December, and if you blink hard enough (or drink enough egg nog) you’ll wake up & find yourself in January of a new year.  For many people, holiday office parties & Christmas shopping comes hand in hand with a few year end financial chores.

There are plenty of these financial “chores” you could occupy yourself with if you chose.  But since December 31st coincides with the end of the tax year, today’s post will cover my 5 favorite year end tax planning tips.  These are five of the most common year-end opportunities I see to reduce your long term tax liability.

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The Home Office Deduction 101: Simplified Method vs. Actual Expense Method

The Home Office Deduction 101: Simplified Method vs. Actual Expense Method

Even though we don’t currently prepare tax returns for clients at my financial planning firm, tax is a topic that comes up a lot.  Many of our clients own businesses, and most of them share two opinions:

Alongside that there are several tax related questions that come up fairly frequently with our clients.  One of them is the home office deduction.  How can you take it?  Are you even eligible?  What can do to take a larger home office deduction this year?  What are your options?

Whereas employees and small business owners alike were eligible to take the deduction prior to 2018, the Tax Cut & Jobs Act eliminated home office expenses as a miscellaneous itemized deduction.  That means that rather than deducting home office expenses on Schedule A as an itemized deduction, they’re now claimed on Schedule C.  And since Schedule C only contains information related to self-employment, the tax law change essentially means that employees are no longer eligible to take the deduction.

For business owners still eligible to take the home office deduction, there are two options for calculating the amount: the simplified method and the actual expense method.  This post will cover both in detail, and explain what you need to know to take the deduction yourself.

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