Executives should plan for possible individual tax rate increases

Republicans in the House of Representatives and Senate are currently negotiating an extension for the 2017 Tax Cuts and Jobs Act (TCJA). As Congress weighs options to raise revenue to support the legislation, certain tax increases are inevitable. One revenue-raiser that has gained some traction is an increase to the highest marginal income tax rate that applies to high-earners. This would increase the highest marginal rate from 37% to possibly 40% for income over $1 million. 

If this higher rate goes into effect in 2026, there may be planning opportunities for high-earners in 2025 and future years to lessen the tax impact on compensation. Businesses and executives should consult with their advisors before implementing planning opportunities so as to understand how higher rates may impact their business and ensure they do not result in adverse tax consequences.  

2025 opportunities

• Stock options: Executives may consider exercising vested stock options in 2025 so the compensation income is subject to 2025 tax rates. For options that will not vest in 2025, consider whether it is appropriate to amend the terms of the option to allow an exercise prior to vesting. Executives could then exercise the non-vested options, receive non-vested stock, make a Section 83(b) election and recognize compensation income in 2025. Executives should consider the tax risks associated with Section 83(b) elections prior to implementing this strategy. 
• Restricted stock units (RSUs): If an executive holds RSUs that are scheduled to vest in late 2025 (e.g., Dec. 31) and that would normally be settled (i.e., the stock is transferred or cash is paid) in 2026, the employer may consider settling the RSUs on or before Dec. 31, 2025. If the RSUs are scheduled to vest in early 2026, the employer may consider accelerating the vesting and settlement to 2025.
• Annual cash bonuses: Annual bonuses are often earned in one year and paid in the next year after financial results are finalized. Employers may be able to preliminarily measure the performance results in December 2025 and pay all or a portion of the annual bonus in 2025, with a true-up (if needed) in 2026. 
• Deferred compensation: Employers may sponsor deferred compensation programs that allow executives to defer payment of compensation to future years. There may be opportunities, although limited, to accelerate payment of the deferred compensation to 2025. Employer should consult with their tax advisors to ensure acceleration does not trigger adverse tax consequences under Section 409A.  

Considerations for 2026

• Employers that issue stock options may be able to issue incentive stock options (ISOs) to executives. If certain requirements are met, ISOs allow the executive to avoid compensation and ordinary income tax that normally applies to nonqualified stock options. Unfortunately, a limited number of ISOs can be granted to executives, but planning can be implemented to maximize the number and benefit of ISOs. Also, ISOs can trigger the alternative minimum tax for the executives, which should be part of an executive’s tax planning.
• A deferred compensation program can be used by employers and executives to defer compensation earned, beginning in 2026 to future years when the payments may be subject to lower tax rates. For example, compensation may be deferred until years after retirement when the executive may not have other sources of ordinary income, resulting in taxes at lower rates. 
• Executives should ensure they maximize the use of tax-favorable benefits offered by employers.  For example, qualified retirement plans (e.g., a Section 401(k) plan) and health savings accounts allow employees to reduce compensation that is subject to income tax in the year earned.