Tax Planning for P&G Employees: Helpful Tips

It’s that time of year again—when tax documents begin to hit your mailbox and the mid-April deadline looms in the not-so-distant future. As in years past, the tax team at Truepoint has put together a list of tips and reminders, this time especially geared toward tax planning for P&G employees (and other companies that offer equity compensation).

Although these steps will help make this tax season less painful, the best tax advice is to create and follow a plan that can make future tax bills more predictable and less painful. That’s why the guidance below will help you look back on last year’s tax events and plan ahead, too.

Understand how equity compensation will affect your tax bill.

When tax planning for P&G employees—and anyone who receives stock options or Restricted Stock Units (RSUs) as part of their compensation package—you should understand how equity compensation is taxed.

Stock options generate taxable income if the stock price, when exercised, exceeds the original grant price. The taxable income reported on your W-2 is determined by taking the difference between the value of the shares at the exercise price and the value of the shares at the grant price.  

As with other payments, the company will automatically withhold a portion of your stock option income to pay for the various taxes you will owe. Often, however, the withheld amount will be less than your actual tax liability. In that case, you will need to pay additional taxes when you file, and you may want to adjust your withholding amount for subsequent years. (More on this below.)   

For RSUs, the taxable income reported on your W-2 is determined by the shares’ value on the settlement date. As with stock options, your company will automatically withhold some of this income to offset your tax bill. In the case of RSUs, the company will automatically sell a portion of your shares on your behalf to cover the withholding taxes due. This occurs whether you choose to sell or hold your shares because the stock is treated as income on the settlement date.  

The remaining shares are then delivered to you, and you can decide at that point to sell or hold those shares. After that, the taxation is determined by short- and long-term capital gains rules as set by the IRS. The cost basis for those shares will be their price on the date they were delivered (i.e., the value of the shares that was included in taxable income).  

Double-check your withholding amounts.

Often with RSUs and stock options, the withholding amount will not be enough to cover your tax bill. When it comes to other sources of income, however, you may find that too much is being withheld.  

It’s a good idea to check exactly how much is withheld from each paycheck and compare that tax-withholding amount to your estimated income taxes. Why? Because many people either withhold too much or too little. If too little is withheld from each paycheck, you may get hit with an unexpected tax bill. If too much is being withheld, you will be overpaid and could choose to receive a refund when you file your tax return. 

Refunds may seem like a good thing, but they essentially mean that you lent the government money during the year. You could have put those funds to better personal use, such as paying off debt, saving more for retirement, or taking a special trip. You should strive for the “goldilocks” level of withholding – an amount that’s “just right.” This will help make next April (and every April) calmer and put more money in your pocket!  

Remember that employers withhold income for state income taxes, too, so monitor that withholding amount as well. Also, in addition to W-2 income, be sure to keep in mind other sources of income, such as portfolio income in brokerage accounts, rental income, and income from passthrough entities. Be sure to check all of your income sources, withholding amounts, and tax costs as you target your “goldilocks” withholding number.  

If you decide you want to change the amount withheld for your taxes, it’s relatively easy. You can file a new Form W-4 at your workplace that includes the added (or subtracted) withholding amount. Taxpayers can utilize the IRS Tax Withholding Estimator to find out if they’ve been withholding the right amount. 

It’s not too late for 2023 contributions.

If you are able, make sure you’ve maximized your contributions to your tax-advantaged accounts.  

The IRS gives you until April 15 (or the tax deadline) of the next calendar year to make those contributions, so use your tax preparation time to double check your contribution amounts to accounts like your Health Savings Account and Individual Retirement Account. Your age, income level, and even place of employment can affect which accounts you can use and how much you can contribute. Consult the IRS web site or talk with your tax preparer for specifics on your situation.  

In addition to making sure you’ve contributed the maximum levels for 2023, it’s just as important to plan your contributions for 2024. Decide if you want to make a lump sum investment into your IRA or if dollar-cost averaging (contributing a set amount regularly) is a better approach for you.  

It’s also a good idea to determine the asset allocation for these contributions—what percentage of the contributions you want going to US equities, international securities, and fixed income instruments, among other possibilities—and try to remain consistent with those targets. Aim to contribute as much as you can to these tax-advantaged funds.  

Strategize your deductions.

The 2017 Tax Cuts and Jobs Act (TJCA) nearly doubled the standard deduction, and it eliminated or limited many itemized deductions. As a result, far fewer people today itemize their deductions. In 2024, the standard deduction will increase to $29,200 for those married filing jointly, $14,600 for those single or married filing separately and $21,900 if you’re head of household. This means that to benefit from itemizing your deductions, you would need to have more than each of these standard deductions in itemized expenditures in 2024.    

It can be challenging to reach this amount without planning. For this reason, we recommend that some clients consolidate their itemized deductions into a particular year to maximize the tax benefits of these expenditures. Because charitable giving is relatively easy to time and control, it can be especially useful for this strategy. With this approach, you combine, or “bunch,” multiple years’ worth of donations into a single year so that your itemized deductions will exceed the standard deduction amount for that year.   

Donor-Advised Funds   

Another powerful strategy when tax planning for P&G employees interested in making charitable contributions is a donor-advised fund (DAF), which is an investment account with the sole purpose of supporting charitable organizations. When you contribute cash, securities, or other assets to a DAF, you can then take a tax deduction on that contribution.

Once funded, the DAF can be invested and generate tax-free growth, which you can grant to any eligible IRS-qualified public charity. You can contribute funds to a DAF one time or over multiple years, however you see fit. The grants themselves are not tax deductible; instead, it is your contribution into the DAF that is deductible.   

For example, let’s say you fund a DAF with $50,000 in 2024. You gift $25,000 from the DAF to your favorite charity in 2025 and $25,000 more in 2026. The $50,000 initial contribution would be eligible for a deduction in tax year 2024, but $0 from the DAF would be eligible in 2025 and 2026. There are additional layers of complexity with adjusted gross income limits and carryovers, but this provides a general overview of how contributions are treated.    

Tax season isn’t only for looking backward.

Although there are many ways to make tax time less painful, keep in mind that old adage: an ounce of prevention is worth a pound of cure. Perhaps the best “tax hack” of all is to create a plan that takes into account your income, your deductions, your investments, and even where you work.

Some strategies are quite specific and even a little advanced, especially when tax planning for P&G employees and others navigating equity compensation packages. This is why we recommend working with a team of experienced tax professionals who have in-depth knowledge of your specific situation. As your life becomes more complex, taxes become less about filling out forms for an April deadline and more about supplementing and supporting your long-term financial goals.

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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