Our top year-end tax strategies for investors and entrepreneurs

It’s no wonder that busy founders, investors and technology executives often overlook important year-end tax planning. The end of the year is a hectic time for everyone, as increased personal commitments are shoehorned into busy work schedules. This article can help ease your burden; here are ten straightforward tips for a more successful tax season.  

1. Give via donor-advised funds and foundations 

If you have taken liquidity (distributions, secondary or another large exit) consider making a more significant than usual charitable gift. In addition to fulfilling a philanthropic aspiration, a charitable contribution may provide valuable federal and state tax deductions. Entrepreneurs and investors may want to consider using a Donor Advised Fund (DAF) or private foundation for greater flexibility, rather than making direct gifts to charities. DAFs enable you to manage the timing of charitable deduction from a tax perspective. For additional information regarding DAFs, read: The ins and outs of making a contribution to a donor advised fund.   

Complex assets including private and restricted stock, VC and PE interests and real estate may also be eligible for charitable contributions to DAFs. Donors avoid paying capital gains tax on contributions of long-term shares with low basis. Consult with your CPA before making contributions, particularly with shares that may be eligible for Qualified Small Business Stock exemptions (See strategy nine below).

2. Exercise Incentive Stock Options 

Check with your CPA regarding the opportunity to exercise Incentive Stock Options (ISOs) without incurring additional tax liability under the alternative minimum tax (AMT) exemption. If you are anxious to get the clock ticking for long-term capital gains treatment, consider exercising ISOs early next year as the AMT may not be due until April of the following year. Be mindful of possible tax changes, including those surrounding equity compensation taxation.

3. Make Roth IRA conversions

Year-end tax planning can be especially beneficial to individuals with uneven income streams, providing the opportunity to accelerate or defer compensation. In a lower-than-usual income year, such as a year of bootstrapping a new business, it's often prudent to review existing traditional IRAs and former employer 401(k) plans, and work with a tax professional to determine whether a conversion to a Roth IRA would be beneficial. 

Conversions require federal and state income taxes in the year of the transaction. However, all principal and earnings could grow income tax-free from that point on. Some retirement accounts, including Roth IRAs, may allow you to invest in non-traditional private assets such as angel investments or private equity and provide an opportunity for substantial tax-free growth. Moreover, many of our clients use Self-Directed IRAs to make private investments. 

4. Deduct investment interest expenses 

The mortgage interest deduction is currently limited to the interest on the first $750,000 of mortgage debt. To take advantage of low interest rates and tax deductibility rules, consider using the investment interest expense deduction strategy, especially if your balance sheet normally carries substantial amounts of Net Investment Income. It is important to optimize balance sheet leverage from a tax standpoint and maximize tax deductions such as investment interest expenses. 

5. Contribute to self-employed retirement plans

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 contributions in 2022, plus a $6,500 catch-up amount for 401(k) plans, all pre-tax. There are additional retirement savings options, such as defined benefit and cash balance plans that allow for significantly higher pre-tax contributions as well.

Related read: Helping entrepreneurs see around the corner: Minimizing taxes and optimizing liquidity during a startup  

6. Consider annual gifting and wealth transfers

Consider using your annual gift tax exclusion amount to a non-spouse ($16,000 per donor, per recipient) by funding a custodial account (UTMA/UGMA). Ideally, gifts of low basis stock to a custodial account could be sold during a more preferential tax bracket environment. Also, gifts to minors can be provided within the gift exclusion amount to fund a traditional IRA or a Roth IRA up to $6,000 per year. 

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 ($80,000 for individuals in 2022) without a gift tax consequence. For additional gifting advice, read: Educational gifts that make for wise investment strategies.  

7. Consider Series I Savings Bonds

With interest rates on the rise, savings bonds are back on investors’ radars. The annual interest rate on Series I bonds purchased November 2022 through April 2023 is a respectable 6.89%. The bonds, backed by the federal government, are also exempt from state and local taxes. Federal taxes can also be avoided if the bonds are used to fund qualifying educational expenses. With the current interest rate environment, it makes sense to revisit the advantages of bond investments with your Wealth Advisor.  

8. Avoid year-end mutual fund investments that include capital-gain distributions

When investing in mutual funds, the timing of your purchase may have unforeseen tax consequences. Mutual funds that make capital-gain distributions, typically in November or December, are taxable if your investment is made before the fund’s record date. 

When considering a late-year mutual fund purchase, it can be advantageous to make your investment after the fund’s distribution eligibility date, thus avoiding the associated taxes. The good news is this isn’t a problem for mutual fund investments made for tax-deferred accounts such as IRAs.  

9. Assess capital gains and losses, including Qualified Small Business Stock

Many of our clients have assessed the opportunity to reduce their capital gains burden by taking advantage of the Qualified Small Business Stock (QSBS) exemptions. This can be beneficial for founders, early employees and investors. If a stock is eligible for the QSBS exemption, one may be eligible for up to a 100 percent exclusion from the federal capital gains realized from the sale. There are strict requirements for the stock to qualify as QSBS and the percent of tax exclusion varies, so be sure to bring up the issue with your CPA. 

Related read: Startup taxes: making the QSBS exemption work for you 

10. Employ tax-loss harvesting

Tax-loss harvesting is another effective tax strategy to consider. 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 capital gains realized in the year. Any unused capital losses could be carried forward into future years indefinitely, providing a valuable tax-management tool. 

It is important to be familiar with the wash sale rule when considering this strategy, as it 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 closed down. Those losses are treated as ordinary losses rather than capital losses on your tax return, and could result in a greater tax benefit. 

Most entrepreneurs and investors are laser-focused on growing the companies they love year-round. With the final months of the year upon us, it is an opportune time to review personal finances to ensure you do not leave potential tax savings on the table. We would be happy to work alongside your tax and estate advisors to determine the most effective approaches for you. Simply contact an SVB Private Wealth Advisor to get started on your strategies. 

Gerald E. Baker

Gerald Baker is head of trust, fiduciary and custody services and head of wealth and fiduciary strategies for SVB Private, a division of First Citizens Bank.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of Silicon Valley Bank, a division of First-Citizens Bank and First Citizens BancShares, Inc. 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.