You know that our tax laws changed a lot on January 1. But what you might not know is, “What should I do about it?”
These two articles do a good job of describing, in greater or lesser detail, what the changes are:
- Michael Kitces’ blog (definitely on the “greater detail” end of the spectrum)
- Journal of Accountancy (despite the name, this is Actually Readable by Actual Humans, and it’s not that long)
“This is all faaaascinating,” you might be saying, “but what I really care about is whether I should be doing something differently with my money now.”
And that is what I address below. If you work in the tech industry, here’s how you should be changing your finances to adapt to the new tax law.
Consider Making These Changes
Because the tax brackets are generally moving down this year, your top tax rate (including state income tax) could very well go down, especially if you live in a low-or-no-income-tax state, like WA (hello!).
Alas, if you live in high-tax states like CA, NY, and OR, because of changes to state-income tax and property tax deductions, your top tax rate might well go up.
Consider doing this if your top tax rate is going up (you live in CA, NY, OR, etc.):
- Max out your 401(k). And pay attention to get this year’s max, which is $18,500, up from $18,000 (the 2017 limit).
- Make your 401(k) contributions more pre-tax than Roth (reduce your taxable income)
- If you also invest outside of your 401(k), hold investments that produce a lot of taxable income (real estate, traditional bonds) in your 401(k) instead of that taxable investment account.
Consider doing this if your top tax rate is going down (you live in WA):
- Again, increase your paycheck deferral to your 401(k) to the new annual max ($18,500).
- Make your 401(k) contributions more Roth (after-tax) than pre-tax, assuming your employer provides a Roth 401(k) (take advantage of lower taxes now)
- Make after-tax contributions to your 401(k), again assuming your employer allows this kind of contribution.
Do you usually itemize your taxes? You’re less likely to do it now because of changes to the standard and itemized deductions. And if you don’t itemize, you usually don’t get any tax benefit from donating to charity.
Consider doing this: To help you maximize the tax benefits of charitable contributions:
- “Bunch” your charitable contribution every 2 or 3 years. Instead of donating the same $x every year, donate $2x every other year, or $3x every third year. Or, even more tailored to your personal situation, save your charitable contributions for years where your income is particularly high (lots of RSUs vesting? exercised stock options? got a signing bonus?).By “bunching,” you’ll get to itemize in that one year, and take the new, higher standard deduction in non-donation years.
- Many of my clients have trouble figuring out just which cause (of many!) to donate to, and this holds them back, especially from making a big “bunched” donation. If you face that problem, too, then donate to a Donor Advised Fund: you can get the tax write-off now and choose the charity later.
- Donate “appreciated” investments instead of cash. “Appreciated” investments are stocks, mutual funds, and ETFs whose value has grown since you bought them. Given the way tech stocks and the broader stock market have been moving in the last few years, your investments have probably grown in value. Even if you don’t get to “itemize” the value of the donation, you still get to avoid the tax you’d have to pay on the gains in those investments if you sold them.
Of course, ideally you both “bunch” and donate investments…double tax whammy! (in a good way)
Now, getting a tax benefit should be the second reason you donate to charity. First being that you want to make the world a better place. So, if all these tax considerations are making it impossible for you to simply start donating, just start donating cash now directly to the charity. Figure out how to optimize later.
We can no longer deduct unreimbursed expenses we incur as employees. But, if you have self-employment income, it’s possible that you can still get a tax benefit if you’re able to shift some of those expenses from your personal life to your business life.
Consider doing this: Go through your list of expenses in your personal and business lives. Are there any legitimate ways you can shift expenses (that is, “ordinary and necessary” expenses, according to the IRS) to your business, where you can still write them off against business income?
Exercising Incentive Stock Options
Once upon a time, in the late 1990s, Incentive Stock Options were quite common. Now, Restricted Stock Units are more common. But still, you might get ISOs! Usually, that’s a lucky thing.
One of the few, but major, downsides of Incentive Stock Options is that you might end up owing a higher Alternative Minimum Tax when you exercise them.
The new tax law, while it doesn’t eliminate AMT, makes it much less likely to impact most people. Exercising ISOs, alas, is one of the few remaining ways that’ll probably result in AMT.
Consider doing this: Because the AMT still exists, and is still a PITA to figure out, you still need to be careful when exercising Incentive Stock Options. Ideally, you’d work with an accountant to estimate the tax impact of exercising ISOs before you do it and use that input to choose an exercise “schedule” that balances your goals, risk tolerance, and minimizing taxes.
If you take a loan from your 401(k), and then you leave your job, you now have 60 days to repay it (instead of needing to pay it back immediately), and you can re-pay it into your IRA, if you roll your 401(k) to an IRA.
So, this reduces the risk of 401(k) loans a bit, maybe even significantly, for you. Especially if you’ve got some sort of Rube Goldberg machine of money movement set up to, say, come up with the downpayment for a home.
But a major risk remains, untouched: your 401(k) is for retirement, and I fear that taking a loan from it for Other Than Retirement establishes the wrong habit and mindset around that money.
Consider doing this: Repay that loan ASAP anyways! And really really think twice before taking it in the first place.
Getting a New Job
Without getting too much into a political view of these changes: If you work in tech, you are so much better off than your Average Joan. As some women’s supports and rights get stripped away at a federal level and in many states, many tech companies are stepping in to provide that support anyway. Tech companies also tend to be in states that have more-women-friendly politics. Sarah Lacy talks about this phenomenon in her rip-roaring new book, A Uterus is a Feature, Not a Bug.
In the new tax law, the Family and Medical Leave Act is improved. Your employer must, by federal law, offer you 12 weeks of unpaid, job-protected leave if you have to take care of a family member or for your own health reasons. The most common time you’ll get FMLA, of course, is when you have a kid. And now, your employer gets a tax credit if they actually pay you during that leave.
This is progress, but it’s also the case that if you work at a company like Google, your company already provides more and better benefits than this federal change requires.
When you are looking for a new job, look at more than just your job description, your salary, and your equity. Look at employee benefits! They can affect your life dramatically.
Misc: Sexual Harassment
Surprised to see this in a blog post about tax law? Well, I was surprised to see it in the tax law itself!
And it is particularly pertinent to the tech industry, given all the (un?)believable stories we’ve heard over the last year or two from women in the industry.
If a company settles a sexual harassment suit, it used to be able to deduct from its taxes any costs associated with that case. Now, the company can still do that, but it can’t require you to sign a Non-Disclosure Agreement at the same time. Alternatively, they can require an NDA, but then they can’t deduct the expenses.
So, companies face a choice: Keep the plaintiff quiet and don’t get a tax break, or let the plaintiff talk publicly and get a tax break.
I’m still having a hard time believing this Congress put something so seemingly progressive in the tax law….
Taxes Are Too Complicated for the Back of a Napkin
With every tax reform, we have to learn how the new system works and suss out new strategies. For all but the most basic calculations, I think taxes were and continue to be too complicated to just “wing it” when figuring out how a change in your finances might affect your taxes.
Especially if you’re in tech—you probably have some sort of stock compensation, you probably get paid well, and you probably live in a high-tax state—finding an accountant you feel comfortable with is important. Maybe it’s a few hundred bucks a year, but that’s so easy to get back in better tax decisions.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.