Tri-Valley companies are booming. Both public and private companies headquartered in the Tri-Valley (Pleasanton, Livermore, Dublin, San Ramon and Danville) have experienced tremendous growth in the last decade, and 2018 was no exception.
Tri-Valley startups raised more than $500M in venture capital investments in the last 12 months alone and over the same time period public companies headquartered in the Tri-Valley outperformed the S&P 500 by over 25%.
If you’re fortunate enough to work for these companies, you’ve likely taken part in some of this success. The downside of course is that your tax payments have likely soared to new levels as well
So what can you do to mitigate the sting of the 2019 tax bill, and tax payments for future years? Here are 10 proactive steps you can take to not just save on taxes today but minimize cumulative taxes paid going forward.
1. Max out 401k ContributionsCurrent contribution limits are $18,500. If that sounds overwhelming, at minimum contribute enough to max out your employer’s match.
2. Max out Other Pre-Tax Contributions
If you have a High Deductible Health Plan (HDHP) you can contribute $3,450 ($6,900 per family) to a Health Savings Account with pre-tax dollars. If you don't have a HDHP, you can still contribute $2,700 ($5,400 per family) of pre-tax dollars to a Flexible Spending Account (FSA) for medical costs. If you have children, up to $5,000 per family can be allocated to Dependent Care accounts to cover childcare costs with pre-tax dollars.
3. Contribute to an IRA
If you make less than $73K ($121K for married couples filing jointly), your $5500 contribution is tax-deductible. If you make more than that, you can still contribute to a nondeductible IRA and convert it to a Roth. You will benefit from tax-free growth and not have to pay taxes when you withdraw in retirement.
4. Contribute to a 529 Plan
529 plans allow for tax-free growth for qualified educational expenses for your kids. This is the best way to save for college and as of last year you can use $10K per year for K-12. With a 529, you can expect major tax savings in the future vs. investing that money in your own savings account or a UGMA and paying capital gains tax when you sell investments to pay for college later. More on the benefits here.
5. Know About AMT and Be Aware of Triggers
The Alternative Minimum Tax (AMT) is a parallel calculation that eliminates deductions and credits and increases tax liability for an individual who would otherwise pay less. Understanding the factors that can “put you into AMT” can help you plan to avoid it when possible. Triggers include: high income, realizing a large capital gain, and exercising Incentive Stock Options (ISOs).
6. Defer Realizing Income
If you can control the timing, wait to realize a large capital gain or significant income event for a year when your other income may be lower. Example: consider the timing of selling a house for a gain or loss or timing the sale of concentrated stock position, when you have a large RSU grant vesting.
7. Plan Timing of Options Exercises
Exercising Incentive Stock Options (ISOs) can put you into AMT even if you hold on to the stock.
8. Hold Incentive Stock Options (ISOs) for Capital Gains Treatment
Exercising and holding ISOs for over one year allows the gain to be taxed as capital gains instead of ordinary income. If you're comfortable taking the risk of holding the stock position for a year, the marginal tax difference can approach 20%.
9. Asset Location Matters
We don't recommend day trading, but any short-term investing is better to do in your IRA. Your taxable account is the place for tax-efficient, long-term investments like stocks of solid companies you expect to hold for years, tax-exempt bonds and ETFs. Most mutual funds distribute taxable capital gains every year, so you can be paying taxes even if you didn’t sell any positions.
10. Tax Loss Harvest
When possible, try to offset realized capital gains with losses to neutralize your tax bill. If you've realized losses without gains to offset, the unused portion can offset your taxable income up to $3K per year and carried forward to future years.
Disclosure: Each individual’s tax situation is unique, and the planning tips mentioned above should be discussed with your personal tax advisor. The items listed above are potential planning tools to be aware of. Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security.