Wall Street closed out a winning April after more companies said their profits at the start of the year weren’t as bad as expected. Here are 3 things you need to know:
Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.
Indices:
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
Despite the banking-sector turmoil seen in March, the S&P 500 rose in March, helped by strong returns from growth stocks that were buoyed by falling bond yields. Here are 3 things you need to know:
Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.
Indices:
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
2022 is not a year on which I shall look back with undiluted pleasure. In the words of one of my more sympathetic correspondents, it has turned out to be an ‘Annus Horribilis’. May the New Year 2023 be more prosperous.
Here are 3 things you need to know:
Sources:
Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.
Indices:
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
By: Paul Horn, CFP®, CPWA®, Senior Financial Planner
As the final part of the series, we look at Employee Stock Purchase Plans (ESPP). Although these are not explicitly for executives, this is an important benefit that is not well understood and often underutilized. In case you missed Part 1 on Deferred Comp plans and Part 2 on Stock Options, read here and here, respectively.
Employee Stock Purchase Plan (ESPP)
While technically this is not specific to executive compensation, it is an important benefit offered by many employers that is underutilized and not understood. An employee stock purchase plan (ESPP) allows any employee to purchase their employer’s stock, typically at a 5% – 15% discount. For example, if the stock is $20 per share and the company offers a 10% discount, the employee pays $18 per share and from day one they have a $2 gain on the stock. Typically, these stock purchases are done via payroll deductions like other benefits. Participating in an ESPP can be an important strategy to accomplish your financial goals. Getting a discount on your stock purchase and holding it so it can appreciate over time is a good strategy to accumulate wealth.
The taxes on ESPP plans can be complex since not all plans are the same. The discount is taxed as ordinary income at the time of purchase. You will then pay taxes on the gains of the stock when you sell it (either short-term or long-term capital gains tax depending on your holding period). Speak to a Certified Financial Planner™ professional to understand the tax rules around your particular plan.
Tips for ESPPs
As you can see, we have just covered the tip of the iceberg when it comes to understanding executive compensation. It is always best to work with a CFP® professional who can help you understand your benefits and put a plan together to maximize them.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.
As we wrap up 2022, it’s important to take a closer look at any year-end investment decisions that could result in substantial tax savings.
In terms of investment planning, investing in capital assets may increase your ability to time the recognition of some of your income and may help you to take advantage of tax rates that are lower than the ordinary income tax rates. You have the flexibility to control when you recognize the income or loss on many types of investment assets. In most cases, you determine when to sell your capital assets.
In some cases, however, shifting potential capital gain income to other taxpayers through gifting may be an appropriate strategy.
How do you use the capital gains tax to lower your taxes?
Capital gains and losses are accorded special tax treatment. Currently, the top long-term capital gains tax rate is 20% (for most types of assets), while the top ordinary income tax rate is 37% — that’s a difference of 17%. As a consequence, by converting some of your ordinary income to long-term capital gain income, it may be possible for you to reduce your federal income tax liability.
Tip: Long-term capital gains are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income. The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income.
In addition, the 3.8% net investment income tax applies to some or all of your net investment income (including capital gains) if your modified adjusted gross income exceeds $200,000 for single or head of household taxpayers, $250,000 for married filing jointly, or $125,000 for married filing separately.
Timing your capital gain recognition
Careful timing of when you sell capital assets may help you to reduce your federal income tax liability. For example, if it’s late in the year and you want to sell a capital asset, you can wait until January to sell it so that you realize your capital gain or loss next year (assuming that you have a calendar tax year). This strategy is particularly useful if you are in a higher marginal tax bracket in the current year and expect to be in a lower one in the following year. Timing can also be important because capital gain income increases your adjusted gross income (AGI). The amount and availability of certain tax benefits may depend on the amount of your AGI. For example, the itemized deduction for medical expenses is available only to the extent medical expenses exceed 7.5% of AGI.
Plan your year-end capital gain and loss status
Planning the time when you recognize capital losses may also be important. If you expect to recognize a capital gain this year, you should review your portfolio for possible capital losses that can be used to offset the gains. If you have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of such carryforwards. In general, net capital losses are deductible dollar-for-dollar against net capital gains. Excess losses are allowed to offset up to $3,000 ($1,500 for individuals filing married filing separate tax returns) of ordinary income per year. Losses over and above the limit may be carried forward indefinitely.
The following strategies may be appropriate:
How do you select investments to control income?
You can select investments likely to produce ordinary income such as interest, or income that is taxed at reduced rates (certain qualifying dividends or long-term capital gains). You can also select investments likely to produce ordinary or capital losses. You can control when your investment earnings are taxed, bearing in mind that income distributions are generally not taxed until you receive them (assuming that you use the cash method of accounting). By knowing the tax rules, you can lower your taxes.
What about shifting income?
It may be possible to shift potential capital gains to other taxpayers through gifts. If you are in a higher tax bracket, you might transfer appreciated assets to relatives in lower tax brackets. For example, consider donating appreciated assets that have been held for more than one year, rather than cash. Opening and funding a donor advised fund (DAF) is appealing to many as it allows for a tax-deductible gift in the current year and the ability to dole out those funds to charities over multiple years. There is an annual exclusion for gifts ($16,000 per donee in 2022, $32,000 for married couples).
Whether it’s year-end investment planning or getting answers to your tax and financial planning questions, we’re here for you. Please contact our office today at (888) 726-9378 or email us for a complimentary review. As always, planning ahead can help you minimize your tax bill and position you for greater success.
Prepared by AICPA. Edited by BFSG. Copyright 2022.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.