Steven Jarvis (00:56)

Hello, everyone and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and joining me this week to have a conversation around tax planning, specifically as it relates to equity comp, but more broadly about how we coordinate between financial advisors and tax professionals is Russell Kroeger. Russell, welcome to the show.

 

Russell Kroeger (01:16)

Thanks for having me, Steven.

 

Steven Jarvis (01:18)

Yeah, you and I met in person a couple weeks ago in Seattle, which was a lot of fun. You came to one of our networking events that we do. I love being able to make those in-person connections, but we wanted to continue the conversation and just let a few thousand people listen in on it. So just before we dive right into the tax fun of it all, just give a little bit of background of who you are and what you do, and then we’ll be off and running with this tax stuff.

 

Russell Kroeger (01:38)

Yeah, for sure. So my background is as a financial planner. Went to college to do financial planning, worked at a couple of different firms, found myself out in San Francisco, apprenticing the financial life planning movement. Wanted to start my own firm working with younger professionals. If you’re in San Francisco, you’re going to be working with people in tech and startup ecosystem. And when thinking about building a firm there, really it kind of became obvious that you can’t really copy and paste certain aspects of a client service experience to you know, different demographics. And so, thinking from first principles, tax is obviously a very important component of financial planning for people in tech. And so I did the EA, half of a master’s in taxation, and turned out was learning more doing returns and being an entrepreneur. So I stopped the master’s in taxation piece. And the way that we built the firm was proactive tax projections, tax returns, comprehensive planning, investment management, et cetera.

 

(02:29)

And so was kind of deeply woven into the practice that we built. And during that time, I kind of identified a lot of really interesting opportunities, you know, from a planning perspective, or also just kind of reasoning about putting a firm together, stitching together a service offering, collaborating with outside professionals that, you know, really is catered specifically to people in tech. I think historically, the wealth management investment advisor has kind of been at arm’s length with all things tax and I think is just a great opportunity for us to chat about the specifics of equity comp planning and then also how to do that collaboration.

 

Steven Jarvis (03:05)

We have some fantastic hands on experience and I always love to hear when advisors have done tax returns. If I could wave a magic wand, would it was up to me. I would make every advisor prepare, I don’t know, 40 tax returns at some point in their career. You don’t need to you don’t need to do it permanently. It’s a completely different business model than honestly, there’s probably a lot more opportunity in financial planning more broadly, but you just can’t replace that experience of seeing how an actual tax return works. So love the experience that you have, the emphasis you’ve placed on taxes and collaborating with other professionals of taking that broader approach. But yeah, the conversation we want to have today, we really want to focus on equity comp. And this has been an interesting topic over the especially the last few years as I’ve been more heavily involved with financial advisors because and you’ve probably seen this this even more so than I have over the last several years, you’ve seen a shift in the most common types of equity comp that people receive. It used to be that you saw more incentive stock options, things that had more complicated tax implications that we have to worry about AMT and some of these different things. Whereas now almost across the board we’re talking RSUs and PSUs, which can for people who kind of for the uninitiated, they might see a headline that says, RSUs are just like a cash bonus, treating like a cash bonus, you’re off and running, hey, that’s all you need to know. It’s like, wow, there’s some element to that, but it is not as simple, at in my experience, it’s not as simple as telling somebody to treat it like cash and moving on. So Russell, talk a little bit about the types of equity comp you’re seeing and then whether you’re talking to financial advisors or consumers, how do you just lay the foundation of how people should think about equity compensation.

 

Russell Kroeger (04:40)

Yeah, so to your point, Equity compensation has, you know, the name says it’s like part of your compensation is equity or ownership stake in the company above and beyond cash, bonus benefits, etc. And there’s a lot of reasons why companies do this. And I think maybe if you take a step back and we have a resource in Trayecto, it’s called the equity compensation context map where basically we have an illustration that walks through, it a public company, late stage private, mid stage private, early stage private? And depending on where in the life cycle that company is, the equity that they grant to their employees is going to be different because the company has different incentives to offer different types of equity. So when a company is first founded, there’s likely going to be founder stock or restricted stock, which is similar to RSUs, but there’s some slight differences.

 

(05:30)

And then as you kind of move up, you graduate to options and then eventually double trigger RSUs. And then once you’re a public company, you’ll have PSUs, RSUs, ESPP, right? Like kind of runs the gambit and get a little bit more creative. But I think also to your point about the trends and how things change, one, tax law, there’s some stuff impacting that. There’s also, I think since like 2014, there are some rules around like what wasn’t required to be reported by the custodians, like cost basis being missing, right? There’s a lot of these things are just constantly evolving. But I think, first and foremost, it’s kind of thinking through like, who is the target archetype of the client that we’re looking at? Where are they in the ecosystem? What equity are they likely to have? How is that going to interact with their financial situation? And then kind of what are the tax triggers for various events or decisions that that person has like for RSUs, single-trigger RSUs in a public company? The date that the shares vest, whatever the stock price is on that day, it’s driving taxable income. You have no choice over it unless you quit your job. But there’s other equity type where you can choose to exercise your options. But if you get an option grant and you don’t make that decision, then there’s no tax impact for you. So it’s just of like getting that structure in place. So people kind of have an understanding of, based on where my client is or where I am in this ecosystem, this is what these equity grants mean for me. And here’s how I need to think about the value of them or how to optimize that value from a tax perspective, which may or may not be necessary.

 

Steven Jarvis (06:58)

Russell, I love how you’re painting the sheer spectrum that this can cover because whatever we see, mean, any superlatives we try to use of most commonly or anything like that, there are always going to be exceptions and there is this variety and  I’m getting more and more with taxes where I’ll just say, hey, I pictures or it didn’t happen, which by that, I mean, get the actual documents or let or stop the conversation. And this is especially true when it comes to equity comp, because just like taxes more broadly, your your clients are going to use terms differently than you do. And by differently, I mean, incorrectly. And so when it comes to equity comp, the number of times that a client, of course, I have ISOs. Yeah, because they’ve heard the term ISO before. Of course, I have ISOs. Great. Let’s just get the document. We can take a look at this and it turns out no they don’t have ISOs they have RSUs and then so there’s there’s so much value in getting the real documents it’s not that you shouldn’t trust your clients or they’re not trying their best but this stuff is really complicated and it sounds like you’ve had this experience before as well, but as companies evolve, the same company over time will offer different types of equity compensation. So it’s not even enough to say, well, two years ago the grant I got was this particular type of RSU and here’s the time of year it always vests. These things evolve over time. So yeah, pictures of it didn’t happen. Get the real documents so that we can give meaningful advice on how people should approach these things.

 

Russell Kroeger (08:14)

Yeah, and to that point, right, like you want to be as precise as possible, because if you’re imprecise, it can lead to miscommunication or misunderstanding expectations or whatever that may be. And I know a lot of finance professionals, like, I don’t know, it’s maybe kind of popular to say, like, don’t use jargon, like speak in a way that the client can understand. And I hear why people would say that. But I also think it’s important to be precise as long as you’re the way you’re trying to communicate that is from an education perspective, not a like, you know, I’m an all knowing financial professional and you know, you just need to kind of listen to what I’m saying. It’s trying to help the client so they can speak and use the same language and that, know, if the advisor or tax professional is speaking or the client speaking, we’re all under the same understanding of this is what’s happening.

 

Steven Jarvis (08:59)

Yes, and one of the phrases I love to use, which I originally learned from my good friend Micah, is, ‘Hey, hey, forgive me, Russell. You probably already know this, but here’s how I like to start this conversation with most of my clients.’ And so you’re almost giving the client an out of, they’re just doing you a favor by listening. Because it can feel a little bit intimate, especially a lot of these equity, where we see equity comp the most common in the tech industry, for executives of publicly traded companies, for people who are going to come across as very sophisticated and intelligent, technical people. And so it can be little bit intimidating for a finance professional to feel like they’re going to talk down to this person about what an RSU is. That’s why they came to you. And just like when you go to the doctor and they use all this jargon, I think it’s a good distinction on jargon. It’s not that you can’t use the words. It’s not that when I show up to the doctor, I don’t want them to refer to my blood pressure or the different pieces of it. It’s that I want the explanation that comes with it. So we want to be precise. We want to make sure the client understands what type of equity comp they have. But we can’t just end at, well Russell, have X number of shares of RSUs that are gonna invest on this date, so we need to make sure that you don’t get killed in taxes. When your tax return gets filed, we’ve gotta build a foundation that they are gonna be able to relate to and come back to.

 

Russell Kroeger (10:08)

Yeah, it’s all about setting expectations and helping the client be as comfortable and confident as they can be given the uncertainty that’s inherent in the decisions that they’re making.

 

Steven Jarvis (10:18)

Yeah, yeah, Russell, there’s obviously layers that’s not gonna get into some of that, but let’s start by the most common misunderstanding, surprise, concern that I see for taxpayers around the more common types of equity comp I see now. It’s just how…Every single year they get killed at tax time when the taxes come due. At least some of the companies I work with more often right now, they have vesting actually right about now. In April and May, I’m getting a lot of reach outs from the advisors I collaborate with to say, hey, let’s talk about it now, which I love. I would much rather talk about it now, because they get these big vests. as you know, but for people who aren’t as familiar with equity compensation, by default, companies are only required

by the Department of Labor to withhold 22 % for federal taxes. And so this creates this fun little situation where most anybody getting equity compensation is taxed at a lot higher than 22%. And so where they’re significantly under withheld on taxes, on federal taxes. And then you get almost, it’s like this kind of just double blow for them because they get their pay stub where the equity comp vested. And they see like only half of it going to their bank account and so they assume that they had plenty withheld and then they owe tens of thousands of dollars more tax time. And so, reactively explaining to someone, actually what happened is you had federal taxes, you had state taxes, you had your 401k withholding deferral in there, you had, you know, all these different things that got you, they knocked down the total and yes, you do still owe a bunch of taxes. Having that after the fact, is gonna be super painful. Having that ahead of time to say, hey, here’s what you should expect doesn’t change how much they pay ultimately in taxes, but it does change their experience dramatically.

 

Commercial (12:02)

 

Russell Kroeger (12:49)

And I think that’s why that scaffolding is important. I think there are a number of advisors that I’m friends with or leverage Trayecto for their planning and what they have, they have these like one-off blogs on how RSUs work or these different equity types. And when they’re a client, when they onboard a new client or when their client gets a job with this new equity type, they’ll send them a link to that blog post that basically says, oh, by the way, here’s the structure for how this works. So they don’t have to spend that time kind of proactively telling the client about it. It’s just like, Hey, here’s a resource for you. If you want to understand why, but right into your point, they, they feel like there’s really high withholding. And then it’s that level of abstraction because they get paid in RSUs. There’s tax that’s realized on that vest. Fares are sold to cover. Then some shares land in their account. And then they have to think, okay, well, if I’m under withheld on this money. How do I then cover that under withholding? Am I doing it through cashflow, cash that’s on the sidelines or selling my company’s stock? And then if you think about selling your company’s stock, are you selling during open trading windows? Are you setting up a 10B51 plan? Are you selling the shares that just bested or the shares that you’ve held historically? And so I think for advisors to have a structure or a framework for, okay, this is how I’m going to help my client think through this. The client doesn’t have to…memorize all of that jargon. It’s just enough so they can anchor it to that framework. And then they basically have this playbook for this is how I’m going to tackle my situation. The advisor, unfortunately can’t operationalize a lot of these transactions, whether it’s exercises or sales, the way they can in the portfolios that they manage. So you really have to be able to give it to the client in a way that is very digestible for them, but then they can also operationalize it kind of in spite of the investor psychology because no one wants to be the person clicking the sale button because two days or a week later, the price could go up and everybody wants to sell at the highest price.

 

Steven Jarvis(14:45)

That’s such a good example of why the collaboration is so important in multiple directions, because you bring up a really good point that I don’t see on the tax preparation side of, there’s a difference here. And even just how the investment side of it gets executed, to your point, that’s usually within the company plan with potentially the different custodian that the advisor doesn’t have visibility or certainly not access to initiate those those trades. There’s the cash flow piece, there’s the where do we generate the funds, there’s the open trading windows that you mentioned. There’s a lot of nuance just in timing and execution on the investment side. And then there’s the tax reporting piece, which we talked about, by default people are gonna get killed on taxes at tax time for Equity Comp, almost 100 % of the time if you don’t do something proactive. the next, right now we’re only talking about the gap in withholdings, which is very real.

 

(15:35)

The other piece, and you mentioned earlier, I wanna tie it back in here so that everyone’s clear on how this comes up and how to avoid it. You mentioned custodians not reporting basis correctly. And geez, I would love to see them fix this one. And this is one of the ones that irritates me probably more than most of the terrible reporting that comes from custodians. Because in a lot of bad tax reporting from custodians, the argument is, well, the custodian doesn’t have all the information, and so it’s up to the advisor, the taxpayer, the tax preparer, whoever. Go figure out if it was a QCD or a backdoor Roth, like that’s on you. For most often what I see on Equity Comp is you have a page like two or three of the 1099 composite at the end of the year that says proceeds $100,000 basis zero. And so a gain of $100,000. And then on page 27, it says, oh wait, nevermind, adjusted basis and now there’s like a $3 loss.

 

(16:24)

Because maybe it didn’t have obviously it never sells at the exact moment at Vest but pretty close, but so they already had the information and some of the tax prep tools are getting better at scrubbing data out of these But they’re still not perfect. This is something you have to be hyper aware of if you are a tax professional or a financial advisor who’s working with people in equity comp. One of the biggest refunds I’ve ever gotten for someone from amending a return was because they were double counting the income for non-qualified stock options because they didn’t understand that nuance because they took the W-2 they got and they took the 1099 they got, which they’d always been told, well, these are gospel, just follow them. And they reported it just as it was given to them. And so the client didn’t really do anything wrong. They just weren’t given the right information. And so we went back and amended multiple years of returns for them and got tens of thousands of dollars in refunds that was just them. Double paying the IRS. And by the way, that is a double payment to the IRS that the IRS is never gonna identify on their own. The IRS is a lot better at identifying it the other way. And Russell, know if you’ve seen this, but in the last year in particular, I’ve seen more and more instances where not only do we have to go in and make sure it got reported correctly, but we have clients starting to get IRS letters that say, hey, you submitted a tax return that doesn’t match this document from your custodian, we want more money from you. And then we have to very nicely send a letter to the IRS with the same 1099 the IRS already has that says, hey, you didn’t look at page 27, we’re not giving you any more money.

 

Russell Kroeger (17:55)

Yeah, there are a lot of nuances when it comes to reporting and to the point that you made, there’s, it’s not just the taxable income. It’s not just, you know, which taxable or which events that recognize taxable income have withholding or don’t have withholding, right? Cause RSU vest or an NSO exercise with spread, right? Like those will have automatic withholding on them. But some decisions don’t have automatic withholding. And then you have to, as a professional, do the projection with an understanding of what those numbers should be, irrespective of how they’re eventually reported, set those expectations for the client. You have to have a deep enough understanding of all those moving pieces to set those proper expectations. And then doing the tax optimization, the strategy, that implementation piece. And then when those tax documents show up, then you have to do the work to make sure…Okay, it doesn’t matter how these were reported. I know how they should be taxed and therefore we’re doing this or we need to ask for the client for this additional information, whether it’s the 1099 supplemental or anything like that. And it puts a pretty significant burden on the tax professional because the financial planner, unless you do tax returns in house for your clients, you don’t have to live with this. So you kind of are just like, hey, I came up with this strategy. Maybe we coordinated with the tax professional, but then it’s like, okay, well, when is my return going to be done?

 

(19:13)

Or like kind of when can we start doing tax projections for the current year? Maybe you’re trying to do a Q1 projection and all of that stuff. And it’s just kind of kind of honoring how disjointed and bad that process is for taxpayers and the role that tax professionals have in making sure that everything is prepared correctly. Even if the tax projection was done correctly, fixing the misreporting and all of that is another level on its own.

 

Steven Jarvis (19:38)

Equity Comp is a great example of how valuable tax planning doesn’t always equate to massive tax savings. At least for me Russell, a lot of the work I do with clients proactively around tax planning as it relates to Equity Comp is preventing paying and making sure everything gets done correctly. At least…I’m not aware of the, and here’s how you never pay taxes again on your RSUs. This is about managing expectations, about helping people have a good experience, because what we often see is somebody has an RSU vest, this really exciting moment in their life. For some of them, it’s the first time it’s ever happened, they never thought they’d make this kind of money, they have this great experience where they have this equity, they’re seeing their hard work pay off. And then six months later, nine months later, they get to tax time. They get killed in their tax bill. They have a big underpayment penalty due, which more often happens the second year they have equity comp, because of how the safe harbor rules work. But you take this incredible moment in their career and you just completely sour it if you’re not proactively working with them.

 

Russell Kroeger (20:39)

Yeah, and I think to that point, right, it’s there are probably much better tax optimization, tax mitigation strategies for earlier stage people, whether it’s exercising options, QSBS eligibility, 83B elections, those types of things. And then being able to connect those decisions with maybe some other tax planning or tax optimizations that you’re doing. Right to kind of connect the dots between other aspects of their financial situation and the equity comp But to your point, I really do think it primarily is around that expectation setting and then anchoring decisions that need to be made the order in which those decisions needs to be made to their other financial goals right to your point of , you can get hammered at tax time, but if you know what that tax liability is and you’ve prepared for that, that’s a completely different story, right? Like 50 grand is 50 grand, but if you know you have to pay the 50 grand and it’s there and then you’ve already strategically said, okay, well, if I have this 50 grand for taxes carved off, this is what the rest of my resources can be allocated towards. Cash flow planning, future taxes, option exercises, down payment on the house, 529 plan, those types of things. And if as a financial professional, whether you’re the advisor or the tax professional, if you can set proper expectations for tax liability, the tax bill is a little bit less relevant. Like, yes, everybody would prefer to pay less in taxes, but if there’s not a tax optimization strategy, or if the ROI on that strategy isn’t there, or if you’re overly complex and you can do something that’s a little bit more straightforward, right? I think generally that plan is going to win the day. The more straightforward plan that directly connects to their goals and unlocks certain things in the future, that’s what people care most about as long as they have those proper expectations.

 

Steven Jarvis (22:24)

Russell, let’s switch gears a little bit and talk a little bit more practically about what advisors can do about this because if this stuff impacts your clients, you need to dedicate time to learning how it works. Not that you need to go get your PhD in it. I love that you talked about realizing the hands-on experience is more important than the classroom learning and just saying, never mind, I’m not going to get the degree. Like, let’s go do hands-on stuff. Again, for advisors listening, especially if you see particular types of equity compensation or if you work exclusively with particular companies. Those are always the advisors who really can navigate this stuff the best is when they work with employees from one or two companies they know exactly how those equity programs work. You’ve got tax planning takes work. You’ve got to dedicate time to understanding how these nuances work so you can draw a roadmap for your clients. Then the next step, mean, we can start really simplistic on things. If you have clients who are getting killed in taxes every year from equity compensation, great, just start with what’s the delta between 22 % and whatever their marginal tax rate is and have them make some estimated payments or help them adjust their withholdings. That would be a really simplistic thing that’s gonna get them a lot closer. But from there, I mean, we really need tools that are gonna help us get further. And so Russell, talk a little about what you’ve done with Trayecto to essentially create a tool that advisors can use to help them draw this map a little bit better of how to navigate Equity Comp.

 

Russell Kroeger (23:44)

Yeah, so Trayecto offers education and software to financial advisors and tax professionals. To your point about not needing to get the master’s class. Unfortunately, the thing about equity compensation is whether it’s a CFP program, EA, CPA, master’s degree. Like you don’t like no one teaches this stuff. The only way to learn is by doing, which is incredibly scary, right? Because if you you know you don’t want to blow up a client situation while you’re learning. Learning the ropes and so we created this education content. We have both cohort based and self paced classes, so advisors can get those reps, get that hands on experience before they start trying to serve those clients, so they can be a little bit more comfortable and confident going into it. And so the reason that we did that is again because that education component is so important is so critical. And then from the software side of things. Ultimately, we want to be able to streamline how advisors and tax professionals engage with this modeling and their workflows around it. So if you think about what are the workflows that I might do for a client or what do I need to stay on top of? There’s predictable and unpredictable events. Tax filing is predictable, estimated tax payment dates are predictable, open enrollment, vesting schedules. You having all the context of when those things are happening is incredibly important. And so the way that we design Trayecto is that all of that stuff is mapped on the client’s timeline. Every VEST event, every open trading window, all of that stuff. And so as that event approaches you, you get an alert or reminder, hey, this thing is happening. Do you need to remind the client about this? Right. And that connects, I think, really well to the comment that we were talking about earlier is experientially, what is the client, right? Like what is their experience with equity compensation, and how can you allow them to operationalize as much of this as possible?

 

(25:28)

Because as advisors, we can’t go in and place the trades or place the exercises. And so it’s trying to kind of be very client centric with the way that you’re giving advice because you’re giving it around these experiences. They’re going to get an email, they’re going to get an alert that these events are happening and they’re like, crap, do I need to make a decision? And if you can remind the client like, hey, this equity is vesting, right? This is the plan for sales, just as a reminder. It’s like, okay, cool. Like, you know, that’s super helpful. Thank you. And so you can kind of get these predictable and non-predictable events, kind of map them on the timeline. And then really when you think about what are the jobs to be done, it’s identifying the tax liability and the tax under withholding, which Trayecto can do based on the way that you entered data into the model. So you would understand, all right, my client has $50,000 of tax under withholding relative to safe harbor rules. Do they need to make estimated tax payments? If so, how much on which dates? Kind of when are they going to be effectively safe harbored?

 

(26:22)

And that’s critical from a cashflow planning perspective, because if you don’t know what the tax under withholding is, you can’t do precise cashflow planning. And so that then starts building on how would you think about doing that more comprehensive financial planning piece. And ultimately, I think what it comes down to is just being able to help the clients make that next best decision. During this year, you’re going to have open trading windows, you’re going to have sale opportunities, you’re going to have exercise opportunities, maybe if it’s a private company. You have a tender offer and you have to think about what equity you’re going to sell relative to the exercises that you’ve done or what’s vested. Like this is the tax impact. This is how you can optimize it. And so it’s really just trying to contextualize if this is what the client’s going to experience and these are the different events that they have. Some of them are going to be taxed. Some of them are going to have withholding. Some of them aren’t. And if you can kind of just being able to seamlessly aggregate that and stay on top of all of the clients moving equity comp pieces, it allows you to just kind of seamlessly log in what’s happened so far, what’s happening next, and then what are we going to do about it?

 

Steven Jarvis (27:22)

Tthe nuance is so important. It’s similar to other areas of taxes where we’ve got to make sure we understand the sequence of events and all the things that need to happen and not just the idea and implementation, but the execution and reporting. So I love how you’ve been able to help people just map that out and say, OK, not just what’s the initial plan, but let’s have the reminders. Let’s make sure this stuff gets done, which is great for me too, because one of my most common messages to advisors is, hey, you’ve got to get the tax return every single year for every single client. We have to make sure this stuff is reported correctly. And that kind of is the bookend for that particular tax year. All the things that go into it leading up to that moment. But I’m a huge fan of advisors being proactive, of understanding how these things impact their clients, of understanding when those decision points can happen. Because if we just wait until tax time every year, by default we’re gonna get killed on taxes. That’s just how it’s set up. There’s really not, know, crossing your fingers and hoping for the best is not what your clients are paying you to do. So Russell, before we wrap up here, how do people learn more about what you’re doing or if they want to learn more about Trayecto?

 

Russell Kroeger (28:23)

Yeah, they can go to our website trayecto.io, or send me an email to russell@trayecto.io

 

Steven Jarvis (28:28)

Love it. Well, Russell, thanks so much for coming on. Appreciate your time and sharing your expertise here. For everyone listening, remember that, again, getting those tax returns every single year, pictures or it didn’t happen, you’ve got to get the real documents, whether that’s the equity investing schedules, the original grant, whatever that looks like, make sure you have a plan for how you’re getting this stuff done. That’s where the value comes from when it comes to just serving our clients and particularly around tax planning. So thanks for being here. Until next time, good luck out there and remember to tip your server, not the IRS.