The Fourth Quarter Window on a High-Income Year

Most of what we publish concerns transactions, because a sale is a visible event with a date attached and people know to ask questions about it.

An unusual income year is different. It has no closing table. Nobody hands you a settlement statement. It arrives gradually across twelve months, and the first time many people confront it is when their preparer tells them what they owe.

It is also, in my experience, the situation where the calendar is least forgiving.

What produces one

The triggers are more varied than people expect.

• A business has an exceptional year and distributes accordingly.
• Equity compensation vests, or options are exercised, in a single year.
• A one-time payment arrives. A settlement, an earnout, a bonus unlike any previous bonus.
• Retirement accounts begin distributing, or a conversion is made.
• A partnership allocates income substantially above the historical pattern.
• A concentrated position is reduced.
• Compensation set aside in earlier years comes due.

What these have in common is that the income lands inside one calendar year rather than being spread across several, and the graduated rate structure does the rest.

Why the fourth quarter matters

Two reasons, and they pull in opposite directions.

The first is that by October you finally know the number. Nine or ten months of the year are behind you, the exceptional event has either occurred or been scheduled, and you can project the year with reasonable confidence. Before that, planning is guesswork.

The second is that most of what could be done has to be in place by December 31.

That is a narrow corridor. Roughly October through mid-December, allowing for the fact that nothing gets accomplished in the last two weeks of the year and that any structure requiring documentation, funding, or a third party needs lead time measured in weeks rather than days.

I tell people the practical deadline is around the first of December. Not because anything happens on that date, but because everything after it happens under pressure, and pressure is how mistakes get made.

What the projection needs

Less than people assume.

Year-to-date income by category, since ordinary income, capital gain, and qualified dividends do not behave the same way. Whatever remains scheduled between now and year end. Your state. Your filing status. Any existing deductions, credits, or carryforwards. And whether any of the timing is genuinely within your control, which is the question people most often have not asked themselves.

That last item is worth sitting with. A surprising amount of income timing is discretionary and the discretion goes unused because nobody realized it was there. A bonus that could be paid in January. A position that could be reduced across two years. A distribution that has not yet been declared.

None of that is available to you in April. A meaningful part of it is available in October.

Four categories

When I sort the approaches available for an income year, they fall into four groups. It is a cleaner taxonomy than most and I use it internally.

Timing. Moving when income or a deduction lands.

Shifting. Moving income to a different taxpayer or a different bracket, where the facts genuinely support it.

Code-based. Specific provisions that create an opportunity when their conditions are met.

Product-based. Deductions, credits, and vehicles carrying advantages not found elsewhere.

Most of the first category and a good deal of the third and fourth are governed by the calendar. The second is generally slower and often needs to have been set up in a prior year.

Which is a long way of saying that if you are reading this in October, you have access to more of the list than you will have in December, and considerably more than you will have in February.

What to do now

Three things, in order.

Project the year. Get an actual figure for what you will owe under current facts. Not a feeling. A number. Your CPA can produce this, and asking him in October rather than March is the difference between a considered answer and a rushed one.

Ask which timing is discretionary. Go through everything still scheduled for the balance of the year and separate what is fixed from what is not. This costs you an hour and it frequently changes the picture.

Decide by the first of December. Whatever you are going to do, decide early enough that execution is not compressed into the last two weeks.

If the projection comes back and the number is acceptable, you have spent an afternoon and you can stop reading about this. That is a perfectly good outcome and it happens often.

If it is not acceptable, you have about eight weeks, and you have them only because you looked in October.

This information is general and is not tax, legal, or investment advice. Every situation is different. Work with your own CPA and attorney before acting on any strategy.