Mosaic Financial Partners: How executives can plan now for their 2013 taxes

Depending on your circumstances, year-end tax planning strategies can bring multi-year benefits.

“The end of the year is a great time to review for tax planning opportunities because most of the income items for the year are known,” says Geoffrey M. Zimmerman, CFP®, senior client advisor at Mosaic Financial Partners, Inc.

Smart Business spoke with Zimmerman about some tax planning items to consider.

How can big year/little year planning help?

If your income varies significantly from year to year, look for ways to decrease income in the big income year and increase income in the small income year.   Corporate executives with stock options have flexibility as to when they recognize this income. Employees with access to nonqualified deferred compensation (NQDC) plans have opportunities to defer some annual income.

For the charitably minded, a big income year offers opportunities to leverage the use of a donor-advised fund: A larger-than-normal charitable donation is made to the fund in the high-income year when the itemized deduction has more tax benefit, and then funds are disbursed to your preferred charities over multiple, lower-income years. Charitably minded investors over age 70 ½ with IRAs should consider making some charitable donations directly from their IRA.

Households with unusually low income in 2013 may benefit from accelerating income by exercising stock options, or via a partial conversion from an IRA to a Roth IRA. Once in a Roth IRA, the converted amount plus any growth is generally tax free, and is not subject to minimum distribution requirements. This is a powerful planning tool for managing future income tax liability and preserving wealth across generations.

What’s important to know about alternative minimum tax (AMT) planning?

Households in the early stages of AMT should explore strategies involving timing of itemized deductions, particularly AMT preference items like property tax and state income tax payments.  
Households that are deep into AMT have some significant opportunities beginning at the point where Alternative Minimum Taxable Income (AMTI) exceeds approximately $480,000 up until the point where ordinary tax exceeds AMT. In this range, the top marginal tax rate is 28 percent, not 39.6 percent. The opportunity involves increasing income — via exercise of stock options, IRA to Roth conversions, or other means — if such income would otherwise be taxed at a higher rate in the future.

As a starting point, couples with taxable income between roughly $500,000 and $1.2 million — particularly those with large amounts of preference items — should take a close look here.

What else should executives know about stock options?

Incentive stock option (ISO) strategies deserve a close look at the end of the year. If you have ISOs and are not in AMT, consider exercising ISOs up to the point of triggering AMT. If you’ve exercised ISOs during the year then you need to review your ability to meet the qualifying holding periods and the cost of paying AMT.

The AMT event is locked in on Dec. 31, so year-end planning is crucial to avoid the risk of paying AMT in the current year and ordinary tax the following year if the qualifying holding period isn’t met.

How can executives use NQDC plans?

An NQDC plan allows participants to defer a portion of their income to a future date. Salary deferrals typically may be invested and diversified, and distributions and taxation postponed until separation from service.

A tax-neutral planning strategy matches salary deferrals with stock option exercises of a like amount, moving dollars from a position with single stock risk and a distinct expiration date into a more diversified pool of funds with no explicit expiration date. NQDC plans do have risk because these plans are typically considered company assets until distribution occurs.

Geoffrey M. Zimmerman, CFP®, is a senior client advisor at Mosaic Financial Partners, Inc. 
Reach him at (415) 788-1952 or [email protected].

Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.