Year-end Planning and the New Tax Law Changes. Make Decisions Now to Help Maximize Your Finances

It’s the fourth quarter, and that means it’s that time again for investors and entrepreneurs to start making year-end financial planning decisions. These decisions come at the busiest possible time — work, holiday, and family commitments, but it’s important to plan now to ensure your choices make the most of all the new tax law changes and help protect and maximize your wealth. This year, financial decisions are especially important, because in 2017, Congress passed the Tax Cuts and Jobs Act — which changes many aspects of year-end planning. 

Here are tips to help you speak with your SVB Private Bank Relationship Manager and tax advisor to make sure 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 Incentive Stock Option (ISO) that you may hold. Exercising an ISO is treated as income solely for the purpose of calculating the alternate minimum tax (AMT), but 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 new tax law increased the AMT exemption by 30 percent, meaning you may be able to exercise more stock options before triggering AMT. This is perhaps the most crucial year-end planning consideration, because unintended AMT triggers can occur when ISOs and NSOs are exercised without a comprehensive check for the tax consequences. Here’s a table comparing the 2018 AMT exemptions to 2017 levels:

Alternative Minimum Tax (AMT) Exemption Amounts

  2017 2018
Single taxpayer $54,300 $70,300
Married taxpayers filing jointly $84,500 $109,400

Alternative Minimum Tax (AMT) Threshold Amounts

  2017 2018
Single taxpayer $120,700 $500,000
Married taxpayers filing jointly $160,900 $1,000,000
Source: Internal Revenue Service 

Check with your CPA regarding whether or not you have an opportunity to exercise Incentive Stock Options without incurring additional tax liability under AMT in 2018. If you are anxious to get the clock ticking for long-term capital gains treatment, regardless of the tax liability, you may consider exercising ISOs early next year (2019), since the AMT may not be due until April of the following year.

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 (there are strict rules around it).

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 NII tax. It’s an opportunity worth investigating, as the year draws to a close.

Read SVB’s article about QSBS for more details.

3. Tax Loss Harvesting

Year-end is an ideal time to consider capital gains impacts. When selling a position, investors may realize a capital loss and potentially write off up to $3,000 of collective losses against ordinary income — the rest can be used against any 2018 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 re-purchase the same or a substantially equal security 30 days before or after the sale date.

In addition, Section 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. This year, the standard deductions have almost doubled for the two main filing categories making it tougher for many to itemized deductions. If you don’t have enough in itemized deductions you’ll end up taking the standard deduction — eliminating your ability to reap the tax benefits of those charitable deductions.

New Standard Deduction Thresholds

Standard deductions 2017 2018
  Single $6,350 $12,000
Married filing jointly (MFJ)  $12,700 $24,000
Elderly or blind (single and not a surviving spouse)  Additional $1,550 Additional $1,600
Elderly (both over age 65 and MFJ)  Additional $2,500 Additional $2,600
Exemption Personal exemption $4,050 per family member Eliminated
Source: Internal Revenue Service

Consider “bunching” to avoid the higher standard deduction with a donor advised fund

While the new standard deduction is almost double that of past years, 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 $6,500 each year, you “bunch” two donations into a single year and make one $13,000 charitable donation in 2018 to a donor-advised fund (“DAF”) thereby exceeding the $12,000 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 more details about donor advised funds, read our article about how DAFs can help maximize your charitable giving.

Give appreciated securities directly to charitable organizations:

Another way our clients donate is by using highly appreciated assets (securities) which in most cases is more effective than making a cash donation. It 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 gift 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. 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 $19,000 $0
Amount donated to charity $81,000 $100,000
Personal Income tax savings2 $29,970 $37,000
(37% x amount donated to charity)

5. Transfer twice as much wealth, thanks to the increased Gift, Estate and Generation-skipping transfer exemptions

Under the new tax law, gift, estate and generation-skipping transfer (GST) tax exemptions have more than doubled, from $5,490,000 to $11,180,000 annually for individuals, and from $10,980,000 to $22,360,000 for married couples. This doubling of the exemption could allow you to significantly increase your year-end gifts to children, grandchildren or other beneficiaries. 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).

While these increases are temporary, they are substantial. You might consider gifts to children, grandchildren or other beneficiaries that fall within these limits, or to plan for them to take place over the next several years. It also makes sense to review your wills and trusts, to ensure 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.

The annual gift tax exemption has also increased, from $14,000 to $15,000 per person. This means a married couple could give up to $30,000 in annual gifts to an unlimited number of recipients — including minors in the form of a Uniform Gift to Minors Act (UTMA). And of course you may still be able to make unlimited gifts for amounts paid on behalf of someone else, directly to educational institutions for tuition and medical providers for health care. Check with your tax advisor for help with your specific situation.

Contributions to a 529 college savings 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 2018) without a gift tax consequence.

6. Maximize retirement plan contributions, for continued tax benefit

Year-end financial decisions should always include a review of retirement plan contributions. For 2018, 401(k), 403(b), and 457 retirement plan contribution limits have all increased modestly. All IRA and Roth contribution limits will stay at their former levels. 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 $55,000 of pre-tax contributions in 2018, plus a $6,000 catch-up amount (for 401(k) plans only). The deadline to establish a self-employed 401(k) is December 31st, although the plan does not have to be funded until your tax-filing deadline plus extensions. There are also other types of retirement savings options, such as defined benefit and cash balance type plans that allow for significantly higher pre-tax contributions.

Here’s a recap of all 2018 retirement plans contribution limits:

Retirement Plans

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
       Lookack to 2017
       Lookback to 2018
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

$63,000 - $73,000
$101,000 - $121,000
$0 - $10,000
$189,000 - $199,000
Roth IRA phaseout
       Married filing jointly

$120,000 - $135,000
$189,000 - $199,000
Source: Internal Revenue Service

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 make sure 2018 is a pivotal year for your long-term financial health. With all the tax law changes, it’s important to know what steps to take now, so you’re ready for 2019 and beyond.

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

The Fine Print

1 Assumes a cost basis of $5,000, 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 only available 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 AGI. For example, deductions for contributions of appreciated property to public charities generally are limited to 30% of the donor’s AGI. Excess contributions may be carried forward for up to 5 years.

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About the Author

Larry Crickenberger is a VP, Financial Planning Specialist with SVB Private Bank, where he provides guidance on estate tax, insurance and financial planning issues and helps identify strategies that apply to the unique needs of Founders, VC/PE Investors and Executives. Larry also works to identify a network of financial planning professionals to assist our clients in implementing these strategies, including attorneys, CPAs and insurance professionals.

Before joining Silicon Valley Bank, Larry was VP- Sr. Account Executive with Fidelity Investments in Burlingame, CA serving as financial advisor to high net worth clients. Prior to Fidelity, Larry was a financial advisor with American Express Financial Advisors. Prior to moving to San Francisco, Larry practiced law in Virginia and Washington, DC for over 17 years in the areas of real estate, bankruptcy, business formation and estate planning. Larry also served for several years as a hearing officer for administrative hearings for the State of Virginia. He is a Certified Financial Planner™ (CFP®) Certificant.

Larry serves as President of the Board of Directors of Emergency USA, a 501(c) (3) NGO, dedicated to providing free, high quality health care to people affected by war and poverty. He’s an avid Golden State Warriors and SF Giants fan and enjoys gardening, reading and travel.

The individual named here is both a representative of Silicon Valley Bank as well as an investment advisory representative of SVB Wealth Advisory, a registered investment advisor and non-bank affiliate of Silicon Valley Bank, member FDIC . Bank products are offered by SVB Private Bank, a division of Silicon Valley Bank. Products offered by SVB Wealth Advisory, Inc. are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.