Key Takeaways

  • Learn eight tax strategies to consider before year-end.
  • Changes enacted by the 2017 Tax Cuts and Jobs Act still have a significant impact on personal income and gift and estate taxes.
  • How to take action now before potential changes to the Presidency and the US Senate impact future tax rates, deductions and exemptions.

It’s the fourth quarter, and that means it’s time for investors and entrepreneurs to start making year-end financial-planning decisions. These decisions come at the busiest possible time —amid work, holiday and family commitments — but it’s important to plan now to ensure that your choices make the most of tax law changes and help protect and maximize your wealth.

Here are tips to help you speak with your SVB Private Bank Relationship Manager and tax advisor to ensure that you are optimizing your tax situation while maximizing your wealth and earnings.

1. Time to exercise? Higher AMT exemptions make ISOs and NSOs more attractive than ever.

As year-end approaches, determine if it’s time to exercise an incentive stock option (ISO) that you may hold. Exercising an ISO is treated as income solely for the purpose of calculating alternative minimum tax (AMT), but it is ignored for the purpose of calculating the regular federal income tax. The spread between the fair market value of the stock and the option’s strike price is included as income for AMT purposes. The 2017 TCJA tax law increased the AMT exemption by 30%, meaning you may be able to exercise more stock options before triggering the AMT. This is perhaps the most crucial year-end planning consideration because unintended AMT triggers can occur when ISOs and nonqualified stock options (NSOs) are exercised without a comprehensive check for the tax consequences.

The following table compares the 2020 AMT exemptions with 2019 levels.

AMT exemption amounts

  2019 2020
Single taxpayer $71,700 $72,900
Married taxpayers filing jointly $111,700 $113,400

AMT threshold amounts

  2019 2020
Single taxpayer $510,300 $518,400
Married taxpayers filing jointly $1,020,600 $1,036,800
Source: Internal Revenue Service 

Check with your CPA to determine whether you have an opportunity to exercise ISOs without incurring additional tax liability in 2020 under the AMT. If you are eager to get the clock ticking for long-term capital gains treatment regardless of the tax liability, consider exercising ISOs in early 2021 because the AMT may not be due until April 2022.

2. Determine whether your investments qualify for QSBS treatment.

Check with your SVB Relationship Manager and CPA to see if the qualified small business stock (QSBS) exclusion could apply to you (see IRS Code §1202). There are strict rules to qualify for the exemption.

When a stock qualifies, there is an exclusion of up to $10 million (or 10 times original basis, whichever is greater) of capital gains, including an exclusion from the AMT and the net investment income tax. It’s an opportunity worth investigating as the year draws to a close.

Read SVB’s article about QSBS for details.

3. Consider tax loss harvesting.

Year-end is an ideal time to consider the impacts of capital gains. When selling a position, investors may realize a capital loss and potentially write off up to $3,000 of collective losses against ordinary income — known as tax loss harvesting; the rest can be used against any 2020 realized capital gains. Any unused capital losses can be carried forward into future years indefinitely, providing a valuable tax management tool. Be familiar with the wash sale rule, which may disallow the loss if you repurchase the same or a substantially equal security 30 days before or after the sale date.

In addition, IRC §1244 losses may be useful if you invested in an early-stage private company and the business had to close down. Those losses are treated as ordinary losses rather than capital losses on your tax return and could result in a greater tax benefit.

4. Maximize your charitable giving deductions.

Charitable giving is usually near the top of every deduction list because it’s a great way to give back to the community while benefiting from a tax break. Many of our clients have used charitable deductions to offset income from a liquidity event. The standard deductions have almost doubled compared with 2017 for the two main filing categories, making it tougher for many taxpayers to itemize deductions. If you don’t have enough to itemize your deductions, you’ll end up taking the standard deduction — eliminating your ability to reap the tax benefits of those charitable deductions.

2020 standard deduction thresholds

Standard deductions 2019 2020
  Single $12,200 $12,400
Married filing jointly (MFJ)  $24,400 $24,800
Elderly (over 65) or blind single   Additional $1,650 Additional $1,650
Elderly (MFJ and both over 65)  Additional $2,600 Additional $2,600
Exemption Personal exemption Eliminated Eliminated
Source: Internal Revenue Service

5. Consider “bunching” to avoid the higher standard deduction with a DAF.

Although the new standard deduction almost doubled from 2017, it is still possible for itemized deductions to exceed the standard deduction threshold. One way to exceed the threshold is to “bunch” multiple-year donations into a single year in combination with a donor-advised fund (DAF). Using a DAF allows you to receive the deduction in the year of the donation but stretch grants to charities out of the DAF over multiple years.

Here’s how it works: Instead of making your normal charitable donation of $7,000 each year, you “bunch” two donations into a single year and make one $14,000 charitable donation in 2020 to a DAF, thereby exceeding the $12,400 standard deduction threshold. With a DAF, you can still recommend grants to charity over a number of years. This also provides a deduction against current-year income in years where income may spike due to a liquidity event.

For details about DAFs, read our article about how DAFs can help maximize your charitable giving.

6. Donate appreciated securities directly to charitable organizations.

Another way our clients donate is by using highly appreciated securities, which in most cases is more effective than making a cash donation. This allows you to contribute more value to the charity than if you sold the shares, paid the applicable capital gains taxes and then donated the remaining cash. When contributing to a DAF, it is very important to donate stock with long-term gains. Gifting appreciated securities with short-term capital gains would provide you with a charitable deduction equal to the cost basis of the gift, not the fair market value.

Here’s an example: To demonstrate why donating appreciated investments may be a good option for you, let’s assume that you’re in the 37% federal tax bracket and want to donate $100,000 worth of stock with a cost basis of $10,000. In this example, you see that donating the stock results in no capital gains tax being paid and a larger itemized deduction.

  Option 1: Sell stock and donate the cash net proceeds to charity Option 2: Donate stock directly to the charity
Current fair market value of stock $100,000 (1000 x $100 per share) $100,000 (1000 x $100 per share)
Long-term capital gains tax paid1 $18,000 $0
Amount donated to charity $82,000 $100,000
Personal Income tax savings2 $30,340 $37,000
(37% x amount donated to charity)

1 Assumes a cost basis of $10,000, that the investment has been held for more than a year and that all realized gains are subject to a 20% long-term capital gains tax rate. This analysis does not take into account any state or local taxes or the Medicare surtax of 3.8%.

2 Assumes donor is in a 37% federal income tax bracket and does not take into account any state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity and the donor’s adjusted gross income. For example, deductions for contributions of appreciated property to public charities generally are limited to 30% of the donor’s adjusted gross income. Excess contributions may be carried forward for up to five years.

7. Increased gift, estate and generation-skipping transfer exemptions.

The federal gift, estate and generation-skipping transfer lifetime tax exemptions for 2020 have increased to $11,580,000 for individuals and $23,160,000 for married couples. It’s important to note that the exemption increases will also adjust for inflation each year until 2025, at which time they will sunset and revert to 2017 levels (adjusted for inflation). Although these increases are temporary, they are substantial. You might consider gifts to children, grandchildren or other beneficiaries that fall within these limits — or plan for them to take place over the next several years.

It also makes sense to review your wills and trusts to ensure that the final funding amounts are not tied to these higher exemption amounts. Doing so could avoid an unnecessarily high funding of your trust upon passing. It is also possible that the increased lifetime gift and estate tax exemptions could be reduced with the change of administration and a Democrat majority in the US Senate. This is still uncertain since there are two run-off Senate elections that will determine the makeup of the Senate. In an abundance of caution however, it could make sense to take advantage of the current higher exemption amounts before the end of 2020, since it has been suggested that any reduction by a new Democrat Congress could become retroactive to January 1, 2021.

The annual gift tax exemption for 2020 is $15,000 per person. This means that a married couple could give up to $30,000 in annual gifts to an unlimited number of recipients — including minors under a Uniform Gift to Minors Act donation or a 529 college savings plan. And of course, you may be able to make unlimited gifts paid on behalf of someone else directly to educational institutions for tuition and medical providers for healthcare. Consult your tax advisor regarding your specific situation.

Contributions to a 529 plan would also fall into the annual gifting category and can be front-loaded for up to five years of the annual gift tax exclusion amount ($75,000 for individuals, $150,000 for couples in 2020) without a gift tax consequence.

8. Maximize retirement plan contributions for continued tax benefit.

Year-end financial decisions should always include a review of retirement plan contributions. For 2020, 401(k), 403(b) and 457 retirement plan contribution limits — all have increased modestly; IRA and Roth contribution limits will stay the same as in 2019 at $6,000.

Many investors and early-stage entrepreneurs use self-employed retirement plans as an excellent opportunity to defer income tax liability. The two most popular plans — the self-employed 401(k) plan and the SEP IRA — allow for up to $57,000 of pre-tax contributions in 2020, plus a $6,500 catch-up amount for 401(k) plans only. The deadline to establish a self-employed 401(k) is December 31, although the plan does not have to be funded until your tax-filing deadline plus extensions.

There are other types of retirement savings options as well, such as defined benefit and cash balance plans that allow for significantly higher pre-tax contributions.

2020 retirement plan annual limits

Effective deferrals 401(k), 457, and SARSEPs
       Catch-up contribution
Defined contribution (§415(c)(1)(A))
Defined benefit (§415(b)(1)(A))
       SIMPLE catch-up contribution
Maximum includible compensation
Highly compensated employee
       Lookback to 2019
       Lookback to 2020
Key employee (top-heavy plan)
SEP participation limit

IRA or Roth IRA contribution limit
       IRA or Roth IRA catch-up
IRA deduction phaseout for active participants
       Married filing jointly
       Married filing separately
       Non-active participant married to active participant

$65,000 - $75,000
$104,000 - $124,000
$196,000 - $206,000
Roth IRA phaseout
       Married filing jointly

$124,000 - $139,000
$196,000 - $206,000
Source: Internal Revenue Service

9. Review tax withholding and estimated payments.

Changes to the federal tax brackets were limited to the annual inflation adjustments that occur every year, called cost-of-living adjustments. Apart from that, expect the same basic structure as for 2019, with the same seven tax rates applying to the various brackets. The actual income amounts of the brackets depend on your tax-filing status.

3.8% surtax on net investment income

3.8% tax on dividends, taxable interest, non-qualified annuities, net capital gains, rents and royalties.

Filing Status Threshold (modified AGI)
Married filing jointly $250,000
Single or Head of Household $200,000

SVB Private Bank is here to help

Although crucial financial decisions for the tax year always come at a time when you’re already busy, it’s critical to take steps now to ensure that 2020 is a pivotal year for your long-term financial health. With all the tax law changes, it’s important to know the steps to take now so that you’re ready for 2021 and beyond.

As always, SVB Private Bank is here to help you plan for year-end alongside your tax advisor and legal team.

Lawrence Crickenberger Headshot
Written by
Lawrence Crickenberger
Private Bank

SVB Private Bank Perspectives provides timely insights and financial guidance ranging from the latest tax regulations, tips for helping to prevent fraud and how to plan for a liquidity event.
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