2020 year-end tax planning: make decisions now to help maximize your finances

Key takeaways

  • Higher alternative minimum tax exemption amounts could make this a better time than ever to exercise incentive stock options without incurring additional tax liability .
  • Consider “bunching” your charitable giving in one year to increase your itemized deductions and exceed higher standard deduction thresholds.
  • Consider making gifts to family and beneficiaries now, under increased federal gift and estate lifetime exemptions that will sunset in 2025 or might change with proposed Build Back Better legislation.

Fourth quarter is the 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.Consider exercising incentive stock options to take advantage of the higher alternative minimum tax exemption

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 new tax law increased the AMT exemption by 30%, 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 non-qualified stock options (NSOs) are exercised without a comprehensive check for the tax consequences.

Here’s a table comparing the 2022 AMT exemptions to 2021 levels:

Alternative Minimum Tax (AMT) exemption amounts

  2021 2022
Single taxpayer $73,600 $75,900
Married taxpayers filing jointly $114,600 $118,100

Alternative Minimum Tax (AMT) threshold amounts

  2021 2022
Single taxpayer $523,600 $539,900
Married taxpayers filing jointly $1,047,200 $1,079,800

Source: Internal Revenue Service

Check with your CPA to determine whether you have an opportunity to exercise ISOs without incurring additional tax liability under AMT in 2022. 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 in 2023, since the AMT may not be due until April of the following year.

2. Determine whether your investments meet requirements for qualified small business stock treatment

Check with your Relationship Manager and CPA to see if the qualified small business stock (QSBS) exclusion (section 1202 of the Internal Revenue Code) could apply to you. There are strict rules around qualifying for the exemption, but when a stock does qualify, there is an exclusion of up to $10 million or 10 times original cost basis — whichever is greater — of capital gains, including an exclusion from the AMT and the net investment income tax (NIIT). Read SVB’s article about QSBS for more details.

3. Make good use of 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 2022 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 could 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 charitable giving deductions

Charitable giving is near the top of almost 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 to 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.

2022 standard deduction thresholds

Standard deductions 2021 2022
  Single $12,550 $12,950
Married filing jointly (MFJ) $25,100 $25,900
Elderly (over 65) or blind single Additional $1,700 Additional $1,750
Elderly (MFJ and both over 65) Additional $2,700 Additional $2,800
Exemption Personal exemption Eliminated Eliminated

Source: Internal Revenue Service

While 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. 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 2022 to a DAF, thereby exceeding the $12,950 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, read our article about how DAFs can help maximize your charitable giving.

Another way our clients donate is by giving highly appreciated assets (securities) directly to nonprofit organizations, 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 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 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 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.

If you itemize your taxes, donating to charities from a taxable account can reduce your tax bill. This is particularly true if you can contribute appreciated securities you have held in your account for at least a year. Doing so not only entitles you to a tax deduction (assuming you qualify), but also allows you to eliminate the capital gains tax.

5. Take advantage of increased gift, estate and generation-skipping transfer exemptions

The federal gift, estate and generation-skipping transfer (GST) lifetime tax exemptions for 2022 have increased to $12,060,000 for individuals and $24,120,000 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). While these increases are temporary, they are substantial. You might consider making gifts to children, grandchildren or other beneficiaries who 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 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 these increased exemptions and gift and estate tax laws in general could change with the proposed tax law change in the Build Back Better legislation still working its way through Congress. The effective date of any changes, though unlikely, could be made retroactive to a date certain making it more urgent to take advantage of the increased exemption amounts before any changes are enacted.

The annual gift tax exemption for 2022 is $16,000 per person. This means a married couple could give up to $32,000 in annual gifts to an unlimited number of recipients, including minors, in the form of a Uniform Transfers to Minors Act (UTMA) account or a 529 college savings plan. And of course, you might also be able to make unlimited gifts on behalf of someone else for amounts paid directly to educational institutions for tuition and to medical providers for healthcare. Check with your tax advisor to discuss your 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 ($80,000 for individuals, $160,000 for couples in 2022) without a gift tax consequence.

6. Maximize your retirement plan and contributions for continued tax benefits

Year-end financial decisions should always include a review of retirement plan contributions. For 2022, 401(k), 403(b) and 457 retirement plan contribution limits have all increased modestly. IRA and Roth IRA contribution limits will stay the same as in 2022, at $6,000.

Many investors and early-stage entrepreneurs use self-employed retirement plans as an 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 $61,000 of pre-tax contributions in 2022, 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 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 2021 retirement plans:

2022 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 2021
Lookback to 2022
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

$68,000 - $78,000
$109,000 - $129,000
$204,000 - $214,000
Roth IRA phaseout
Married filing jointly

$129,000 - $144,000
$204,000 - $214,000

Source: Internal Revenue Service

7. Review tax withholding and estimated payments.

Changes to the federal tax brackets were limited to the annual inflation adjustments that happen every year, called cost-of-living adjustments (COLAs). Apart from that, expect the same basic structure used in 2020, with the same seven tax rates applying to the various brackets. The actual income amounts of the brackets depend on your tax filing status. Make sure your withholding and estimated tax payments match your potential income tax liability to avoid underpayment penalties. Similarly, overpayment of these amounts, in expectation of a large refund, reduces your monthly cash flow and results in an interest free loan to the IRS.

8. Anticipate the tax law changes proposed in Build Back Better

There have been multiple iterations of proposed tax law changes in President Biden’s Build Back Better bill as it moves through the legislative process. At this time, it looks like most of the individual income tax changes revolve around a 5% surcharge on modified adjusted gross income (MAGI) above $10 million and an extra 3% tax on income above $25 million, as well as increased IRS enforcement.

With these proposed changes in mind, now would be a good time to talk with your tax and estate planning advisors about:

  • Reviewing estate plans and considering year-end lifetime gifts
  • Making sure you have documentation to support all deductions and credits on your tax returns
  • Possibly accelerating income rather than the usual postponement of income
  • Possibly postpoining deductions rather than the usual acceleration of deductions

SVB Private 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 2021 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 2022 and beyond.

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

Lawrence Crickenberger

Larry Crickenberger is a VP, Financial Planning Specialist with SVB Private, 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.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of SVB Private or other members of Silicon Valley Bank and SVB Financial Group. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein