7 Year-End Tax Strategies for High-Earning Executives

Introduction

Year-end tax planning is critical for high-income executives, where decisions can mean the difference between paying thousands more in taxes or keeping that money working toward your financial goals. Your compensation structure—often including bonuses, stock options, and equity—adds layers of complexity. This guide will not only outline the key strategies but also offer actionable advice to help you take control of your taxes and maximize wealth.

1. Manage Bonuses to Optimize Tax Brackets

Bonuses are a common part of executive compensation, but without proper planning, they can push your taxable income into the highest brackets, triggering additional taxes like the Net Investment Income Tax (NIIT) and the Medicare surtax.

• Why It Matters : Tax brackets are progressive, meaning each dollar over a threshold is taxed at a higher rate. By managing when bonuses are received, you can potentially keep more of your income.
• Strategies to Consider :
  • Deferring Bonuses : Ask your employer if they can delay your bonus payment to January. This shifts income into the next tax year, potentially lowering this year's taxable income.
  • Offsetting with Deductions : Maximize contributions to 401(k)s , deferred compensation plans , or charitable giving to offset the impact of a large bonus.
• Example : Suppose your 2024 taxable income is projected at $480,000, placing you in the 37% bracket. Deferring a $50,000 bonus to 2025 could reduce your current tax bill by $18,500.
• Common Pitfall : Ensure your bonus deferral aligns with cash flow needs and doesn't push next year's income into an even higher bracket due to other compensation events.
• Pro Tip : Work with a tax advisor to coordinate bonus timing with other income sources, such as Restricted Stock Unit (RSU) vesting or stock option exercises.

2. Maximize Retirement Plan Contributions

High-earning executives have unique opportunities to shield significant portions of income from taxes through retirement plans, especially those offered exclusively at the executive level.

• Why It Matters : Contributions to retirement plans are often pre-tax, reducing taxable income in high-earning years while building a tax-advantaged nest egg for the future.
• Options to Consider :
  • 401(k) Contributions : Contribute the maximum—$22,500 for 2024, or $30,000 if age 50+.
  • Deferred Compensation Plans (DCPs) : Defer a portion of salary and bonuses, potentially saving tens of thousands in taxes.
  • IRA Contributions : For high earners, Traditional IRAs may not be deductible, but backdoor Roth IRA contributions are an effective workaround.
• Example : Contributing $50,000 to a DCP could save an executive in the 37% bracket $18,500 in taxes for the year while deferring that income until retirement, when they may be in a lower tax bracket.
• Common Pitfall : Be aware of your company's distribution rules for DCPs. Receiving a lump-sum payout in retirement could create a significant tax burden.
• Pro Tip : If your 401(k) is already maxed out, review whether your employer offers a mega backdoor Roth option to supercharge tax-free growth.

3. Optimize Stock Option Exercises

Executives often receive stock options or equity compensation, which come with complex tax implications. Proper timing can save substantial amounts in taxes.

• Why It Matters : Exercising stock options can trigger taxes on the spread between the grant price and market price. Managing these exercises strategically can reduce tax exposure.
• Key Tax Rules :
  • ISOs (Incentive Stock Options) : May avoid regular income tax but could be subject to Alternative Minimum Tax (AMT).
  • NSOs (Non-Qualified Stock Options) : The spread is taxed as ordinary income at the time of exercise.
• Strategies to Consider :
  • Partial Exercise : Spread option exercises over several years to avoid a spike in taxable income.
  • AMT Awareness : Exercise ISOs early in the year to allow for AMT planning before December 31.
  • Charitable Giving : Donate appreciated stock to offset gains from exercised options.
• Example : If you hold ISOs with a $100,000 spread, exercising in a year with low AMT exposure could save you tens of thousands compared to exercising in a high-income year.
• Common Pitfall : Failing to plan for AMT when exercising ISOs, leading to an unexpected tax liability.
• Pro Tip : Pair stock option exercises with other tax-reducing strategies like tax-loss harvesting to mitigate the impact.

4. Leverage Charitable Giving for Maximum Impact

Charitable contributions are a powerful tool for reducing taxes, especially for high-income executives who face limits on certain deductions.

• Why It Matters : Charitable giving provides both personal satisfaction and immediate tax savings, particularly when using tax-advantaged methods like Donor-Advised Funds (DAFs).
• Advanced Strategies :
  • Donor-Advised Funds (DAFs) : Contribute appreciated stock or securities to avoid capital gains taxes and take an immediate deduction.
  • Bunching Contributions : Combine multiple years' worth of donations into one tax year to exceed the standard deduction threshold.
  • Charitable Remainder Trusts (CRTs) : Provide ongoing income while supporting a charity and reducing taxes.
• Example : By donating $100,000 of appreciated stock with a $40,000 cost basis to a DAF, an executive avoids $14,280 in capital gains tax and receives a $100,000 deduction.
• Common Pitfall : Forgetting to verify that your contributions qualify for deductions under IRS rules.
• Pro Tip : Align charitable giving with years of high income, such as when exercising stock options or receiving large bonuses.

5. Review Tax-Efficient Investment Strategies

Executives often have significant investment portfolios, and optimizing for tax efficiency can reduce the burden of taxes on capital gains, dividends, and interest.

• Why It Matters : High earners are subject to additional taxes like the 3.8% NIIT on investment income.
• Strategies to Consider :
  • Tax-Loss Harvesting : Offset gains by selling underperforming investments.
  • Municipal Bonds : Generate tax-free income, ideal for those in top brackets.
  • Asset Location : Place tax-inefficient assets in tax-advantaged accounts and stocks in taxable accounts.
• Example : An executive with $50,000 in capital gains can offset $30,000 by harvesting losses, saving $11,100 in taxes.
• Common Pitfall : Violating the wash-sale rule by repurchasing a similar security too soon after selling for a loss.
• Pro Tip : Regular portfolio reviews with an advisor can uncover hidden inefficiencies.

6. Utilize Health Savings Accounts (HSAs)

HSAs offer one of the few triple tax benefits: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified expenses.

• Why It Matters : For executives enrolled in high-deductible health plans (HDHPs), HSAs provide unmatched tax advantages.
• How to Maximize :
  • Contribute the maximum: $8,300 for families in 2024 (+$1,000 if 55+).
  • Invest unused funds for long-term growth.
• Example : Over 10 years, contributing the maximum and investing at a 6% return could grow the account to $120,000, completely tax-free.
• Pro Tip : Use current cash flow to cover medical expenses while allowing the HSA to grow untouched.

7. Plan for State and Local Taxes (SALT) Limits

The $10,000 cap on SALT deductions affects many high-income earners. Executives in high-tax states should explore ways to minimize the impact.

• Why It Matters : SALT deductions can no longer fully offset state and property taxes, increasing your federal tax liability.
• Strategies to Consider :
  • Employer Workarounds : Some states allow businesses to pay taxes on behalf of employees, reducing federal income.
  • Relocation : Consider moving to a state with lower or no income tax, especially if nearing retirement.
• Pro Tip : Run projections to understand the full impact of the SALT cap on your financial plan.