RSU Taxes Explained + 4 Tax Strategies for 2024

Taxation is a complex subject, but things become significantly more confusing when dealing with RSUs (restricted stock units).

RSUs are a popular form of compensation for employees, especially in the IT industry. Top tech firms such as Amazon, Google, and Apple give them to top talents in place of stock options.

However, while restricted stock units can be a great way to earn additional income, understanding the tax implications is crucial to avoid any surprises come tax season. In this article, we'll break down all about paying taxes on RSU and provide you with four actionable strategies to consider for the year 2024.

Let's begin.

RSUs and Tax Implications

A Restricted Stock Unit (RSU) is a form of compensation provided by employers. They signify a commitment to award a predetermined number of company stocks to an employee at a future date, contingent upon meeting specific conditions, like a set employment duration or performance goals.

Upon meeting these criteria, restricted stock units are converted into company stock. Subsequently, employees have the option to retain the stock or trade it on the open market. Any profit or loss made from selling the stocks is taxed as capital gains or losses.

RSU Taxation: A Deep Dive

Compared to similar forms of compensation, RSU's tax treatment style is somewhat unique. Here’s what to know:

Vesting: Restricted stock units don't become yours immediately; they vest over time or based on performance goals, affecting when you'll be levied.

Ordinary Income: When restricted stock units vest, their value is treated as ordinary income. You calculate RSU tax by determining the fair market value of the stocks when they are vested and adding it to your taxable income for the year. Your employer will typically withhold taxes at the federal supplemental wages tax withholding rate (typically 22% up to $1 million and 37% beyond) to cover this fee.

Capital Gains: After vesting, any future increase or decrease in the stock's value is taxed. When you sell the RSU shares, the difference between the sale price and the fair market value at vesting represents the capital gain or loss.

So, exactly how much are RSU taxed? You may want to check out these projected federal income tax rates for 2024. Keep in mind that RSU income might also be subject to state and local levies. Therefore, it's wise to consult a tax planning financial advisor for personalized guidance on managing your stocks.

Factors Affecting Restricted Stock Unit Taxes

Several factors can influence the taxation of restricted stock units. Some of the top factors are:

Employment Status: Your job status at the time of RSU vesting determines whether they're levied as ordinary income (while employed) or capital gains (after leaving).

Timing of Sales: When you sell vested RSUs can impact your tax liability; longer holding can lead to lower long-term capital gains rates.

Stock Price Fluctuations: Changes in stock value between vesting and sale can result in varying capital gains or losses and, subsequently, different tax obligations.

Alternative Minimum Tax (AMT): Your financial situation may subject you to the AMT, influencing your RSU liability.

Be sure to stay informed about these factors and collaborate with a professional to create an efficient strategy for managing restricted stock units, that considers your unique financial circumstances.

While restricted stock units are taxed as income upon vesting, and selling RSUs tax is generally unavoidable, there are proactive tax planning strategies that can help you leverage restricted stock units to offset other income and decrease your overall liability. Let's look at some of these strategies.

Tax Strategy #1: Tax-Loss Harvesting

Tax-loss harvesting is a great strategy to limit how RSU sell for taxes. This involves offsetting RSU capital gains with capital losses from other investments. By selling underperforming investments to reduce your overall capital gains, you can potentially lower the liabilities on your gains. This strategy helps to balance gains and losses, but it's essential to do this carefully and in line with investment goals and risk tolerance.

Tax Strategy #2: Donating RSUs to Charity

Donating RSU shares directly to a charitable organization is an efficient strategy to control how RSU is taxed. By donating, you can avoid paying capital gains tax and may qualify for a charitable deduction, reducing your overall obligation. This approach not only benefits you financially but also supports a cause you care about. It's crucial to seek expert guidance on charitable giving and deductions to make the most of this strategy. An expert will also answer the question “When are RSUs taxed?” to ensure that your donation aligns seamlessly with your financial planning goals.

Tax Strategy #3: Utilizing Tax-Advantaged Accounts

Harnessing the power of tax-advantaged accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s, can offer substantial advantages when managing restricted stock units. Understanding the nuances of how RSUs are taxed, you can strategically allocate a portion of your restricted stock units into these accounts, potentially deferring taxation on their income until your retirement years. This not only leads to more savings but also opens the door to the potential growth of your investments within these accounts.

Tax Strategy #4: Tax-Efficient RSU Selling Strategies

This strategy focuses on optimizing the timing and manner of selling your stock units. One approach is staggered selling, where you spread out the sale of your stocks over time to mitigate the impact of short-term capital gains. Another approach involves holding RSU shares for over a year to qualify for lower long-term capital gains rates. It's essential to emphasize that a thorough understanding of how RSU work, taking into account market conditions, and your personal financial goals will help you determine which options to use. Again, a professional can help here.

Planning for 2024 and Beyond

Planning for RSU in the upcoming tax year is crucial for optimizing your financial outcomes. Here are some tips and advice to help you navigate the process.

How Does RSU Vesting Work: It's crucial to be aware of when your restricted stock units vest, as this timing significantly affects when you'll be taxed on them.

Decide How Many RSUs You Can Hold: Determine the number of units you're comfortable holding, based on the fair market value (FMV) or the cost basis for RSU. The rest, you can diversify or repurpose to manage risk and optimize your investments.

Sell a Portion of Your RSUs at Vesting: Erik Miller of Interactive Wealth Advisors, a fee-only financial planner in Portland, suggests selling a portion of your RSUs when they vest, which can help spread out your liability and provide liquidity for other financial goals. Then keep the remainder until the company sells, especially if you believe the stock value will rise.

Stay Updated on IRS Amendments: Be vigilant about changes in taxes RSU laws, as they can influence your RSU liability. Staying informed ensures you can adapt to any legal revisions.

Seek Guidance From an Expert: Restricted stock units can play a huge role in your financial future so investing in estate planning for financial advisors is important for ensuring that you make well-informed decisions regarding your investments.

Conclusion

RSUs could become a valuable part of your compensation package someday, so understanding their tax implications is essential. By applying the strategies we've discussed, you can optimize your RSU cost basis and minimize tax burdens. Hopefully, these strategies will help you navigate the world of restricted stock units with confidence and success, leading to improved financial outcomes.