How Are My RSUs Taxed, and What Can I Do to Pay Less in Taxes?

Restricted Stock Units (RSUs) are a common form of compensation, especially in the tech industry, offering employees the potential for significant wealth. However, the tax treatment of RSUs is often misunderstood which can lead to costly surprises. RSUs are taxed not just once, but twice: first as ordinary income when they vest, and again as capital gains when they are sold. Understanding how each stage of taxation works and how to manage it is essential for minimizing your tax burden and making the most of your stock compensation.

The First Tax

The first tax occurs when RSUs vest and are deposited into your investment account. The tax is based on the fair market value (FMV) of the shares at the time of vesting. This value is treated as ordinary income and taxed accordingly. Since the vesting schedule is set by your employer, you cannot control the timing or amount of income that becomes taxable when RSUs vest.

Example 1:
Katie works at Amazon and has 4,000 shares vesting this year in four separate vests of 1,000 shares each. The taxable amount will be the stock price at the time of vesting multiplied by the number of shares received.

This means she will have a total FMV of $770,000 from RSUs, which will be taxed as ordinary income. This amount also becomes her cost basis for the shares, which is used later when determining capital gains taxes upon selling.

Tip: Paying the First Tax

To avoid surprise tax bills and IRS penalties, it is important to know and pay your taxes on time. Your CPA can help you calculate and pay these, but here is a brief explanation.

Just like with wages, companies often offer the option to withhold taxes from your RSUs to help cover tax liability. Unfortunately, instead of using an accurate estimate based on your tax rate, most companies default to a 22% withholding, regardless of your income bracket. This often results in large, unexpected tax bills at tax time when too little has been withheld throughout the year.

Many companies allow you to adjust RSU withholding, which is a quick fix. Alternatively, making estimated tax payments throughout the year can also solve the problem.

The Second Tax

RSUs are taxed a second time when they are sold. This tax is based on the difference between the sale price and your cost basis (the FMV of shares when received). It’s important to note that if the stock price declines, there may be no second tax or even a capital loss.

Example 2:
Katie decides to sell the stock she received last year. She sells at $200/share. Here’s how each block of shares is treated for tax purposes at the time of sale:

This second tax involves more variables, and as the owner, you have much more control over how much tax you owe. You control when, how many, and which shares you sell, all of which affect your tax bill. With this control comes opportunity, and several strategies can help you minimize this tax burden:

Strategies to Reduce the Second Tax

1. Avoid Short-Term Gains When Selling

   Strategically timing your stock sales can significantly reduce your tax burden. Selling stock within the first 365 days of ownership results in short-term capital gains, which are taxed as ordinary income—up to 37%. Holding stock for more than a year qualifies for long-term capital gains, taxed at 15% to as high as 23.8%, depending on your income.

2. Choose Tax Lots Carefully When Selling

   Each RSU vesting creates a new "tax lot." When you sell, select the tax lot with the highest cost basis, the shares received at the highest price. This minimizes your taxable gain. As your account accumulates multiple lots, this strategy becomes even more effective.

3. Be Conscious of Tax Thresholds When Selling

   Spreading sales over multiple tax years can help you stay within lower tax brackets. Several tax thresholds may increase your tax bill if crossed in a single year:

• • NIIT (Net Investment Income Tax) of 3.8% starts at $200,000 single/$250,000 joint

  • Washington State capital gains tax of 7% begins at $270,000 of capital gains

  • Federal capital gains tax increases to 20% at $518,900 single/$583,751 joint in total income

Awareness of these thresholds and their annual updates allows for better planning and reduced tax liability. These tax thresholds are for 2024 only and will be adjusted in future years.

4. Harvest Capital Losses

   If your stock price drops below the cost basis, you may be able to realize capital losses by selling at a loss. These losses can:

• • Offset capital gains in the same year
  • Be carried forward to offset future gains
  • Be deducted (up to $3,000) against ordinary income

If you want to keep the stock but realize the loss, you can buy the shares back after 30 days to avoid the wash sale rule. Also be careful of selling at a loss around your vesting dates as this can activate the wash sale rule as well.

5. Gift Stock to Charity

   Donating appreciated stock, rather than cash, can provide major tax benefits:

• Deduct the full value of the donated shares on your tax return (up to 30% of your income)

• Rollover unused deductions for up to five years

• Avoid capital gains tax on the appreciation in the shares

This is especially beneficial in high-income years when you’re facing a larger tax bill.

6. Consult a Tax Professional

   Perhaps the most important strategy is to work with a qualified tax preparer or CPA. They can tailor these strategies to your financial situation and ensure they’re implemented properly.

Conclusion

RSUs offer substantial financial opportunity, but they also come with complex tax implications that can easily catch recipients off guard. By learning how RSUs are taxed at vesting and at sale and by applying thoughtful strategies like timing your sales, choosing tax lots carefully, and taking advantage of charitable giving you can better control your tax liability and retain more of your earnings. Always coordinate with a tax professional to tailor these strategies to your individual situation and ensure compliance with the latest tax rules.

Please feel free to reach out to us with any questions that you have about this complex but important subject:

Garrett Grigas, CFA, CFP

Senior Financial Advisor

GEVERS WEALTH MANAGEMENT, LLC

Ggrigas@geverswealth.com

David Halfhill, CPA

Senior Tax Manager

SWEENEY CONRAD, P.S.