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Tax loophole with RSUs?

Posted: Sun Mar 31, 2013 2:01 pm
by jcw
Need some advice from tax experts.

I had $20k in Restricted Stock units in 2011. My company required me to pay stock on vest, so I had to pay $8k (40%) when I got the stock in 2011. The net is that I got $12k in stocks in my account. I sold the stock last year in 2012 at $16k (it increased $4000 since 2011). I have been in graduate school for all of 2012, so I basically made no income in 2012. Using HR Block software, I reported the full $16K of my stock as income. Now, here's the tricky part. Since I had already paid $8K in taxes, I reported this as tax previously paid (a field in HR Block). Because I have no income, that $16k was essentially my total adjusted gross. I'm at the poverty line right now so my tax rate is like 10%. Thus, I only owed like $1000 on that sale of stock (after other standard deductions), which left my with an overpayment of $7000 (of the original $8000 paid in taxes). So I got a huge refund of $7000.

Is this correct? It seems like it shouldn't work this this. I'm going to consult a tax expert but hoping someone here knows the answer.

Re: Tax loophole with RSUs?

Posted: Sun Mar 31, 2013 2:08 pm
by tfb
Not correct. You are mixing a few things. When you paid $8k did you pay out of pocket by cash or by receiving fewer shares? Sounds like the latter. Those remaining shares are fully paid for. You have a basis of $12k. When you sold them for $16k, you have $4k in capital gains, which likely will be taxed at 0% at your income level. The $8k has nothing to do with it. It was (supposed to be) already accounted for in the year you received the shares. You can't count it again.

Re: Tax loophole with RSUs?

Posted: Sun Mar 31, 2013 2:29 pm
by jcw
Ah that makes so much more sense! Thanks! The tricky thing is that E-trade lists my cost basis as a blank (but show my taxes paid) so I thought that I had no cost basis. I'm always confused when calculating my espp and rsus every year.

Re: Tax loophole with RSUs?

Posted: Sun Mar 31, 2013 3:20 pm
by ogd
Hi jcw! I've found that for tax purposes, it helps to think of RSUs like this: when they vest, you are paid income, with which you immediately buy the shares.

So the 8k you paid in '11 was income tax (the shares were part of your compensation). The same day, you "bought" company shares for 12k, with a cost basis given by the then-current price. The 8k income tax withheld does not interact with the later stock sale transaction at all.

Re: Tax loophole with RSUs?

Posted: Sun Mar 31, 2013 6:03 pm
by Calm Man
This is a common trap. The key is to not tell the tax software that this is an RSU. The same applies for nonqualified options. You paid taxes on the RSU when issued in 2011. Your cost basis for the RSUs (which became stock) is the # of shares you received times the value per share on the date of the grant. The company provided you that info. So just enter it as a sale with the purchase date the date you acquired the stock.