RESTRICTED STOCK UNITS
Planning for Executives
Restricted Stock Unit Planning
Ask yourself this question, if you were given a cash bonus what would you do with the money? For most people it would not be to go buy additional shares in their employer’s company. So if your answer was anything other than buy shares, there’s a good chance the right answer for you is to sell in you open window after the vesting date of the shares.
Why sell RSUs?
The employee’s main source of future income (salary) is already tied to the company and thus the employee is taking equity risk in this avenue. Said another way, if the company fails, your income goes away with the company.
If the stock loses value after the vest, you could create a capital loss that could not be fully deductible when you sell the shares unless you have adequate capital gains.
The company likely also provides the family medical benefits and while there are safeguards in place (COBRA) losing a job can be a significant disruption in medical care.
The employee, unless it is their first year of RSUs, likely has a large pool of unvested RSUs that give them a level of exposure to the stock of the company that could be outsized relative to their tolerance for risk. For reference, the Uniform Prudent Management of Institutional Funds Act would dictate that a fiduciary does not have more than 10% of the institution’s capital in one position.
Which lots to sell:
As mentioned above, there are significant advantages to selling the shares as they vest. However, if you do hold shares after they vest, we recommend that you are mindful of the shares that you sell. It is possible that you could have vests with different fair market values at vest and different holding periods. It is to your advantage to specifically identify what lots you are selling the shares from. Our general recommendation of priority is as follows:
First, sell lots held less than 365 days that are held at a loss. (Short term Capital Loss)
Second, sell lots held longer than 365 days that are held at a loss. (Long term capital loss)
Third, sell lots held longer than 365 days that are held at a gain. (Long term capital gain)
Fourth, sell lots held less than 365 days that are held at a gain. (Short term Capital Gain)
Remember, individual facts and circumstances will vary. You should consult your tax advisor on your personal situation.
Interesting facts to remember about RSU’s:
At vesting the income is considered taxable wages as a supplemental income payment
Companies generally are required to withhold minimum federal income tax withholding of 22% on the first $1,000,000 of supplemental income (state income tax withholding requirements vary by state, but if applicable would be additional withholding).
After you exceed the $1,000,000 of supplemental income, the company is required to withhold federal income taxes at 37% (similar to above, state taxes may be applicable)
These withholding rules generally result in you owing additional federal taxes in April when you file your taxes if you have significant income withheld at 22%. A good rule of thumb is to assume you will owe an additional 15% of that income.
If during the period between the grant and vest of your RSU’s you worked/lived in a state with an individual income tax, your employer should withhold state income taxes based upon the percentage of days you lived/worked in that state. For example, if you lived in CA for 80% of the vesting period and then moved to Washington, it is likely your employer would withhold California income taxes on 80% of the income realized on the vesting of the RSU’s (that would result in you needing to file a California nonresident income tax return for that year).
Generally, the capital gain/loss that is recognized upon the sale of RSU’s that you held after vest will only be taxed by the state you are a resident of on the date of the sale
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