My RSU are causing a tax nightmare

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MrRibEye
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My RSU are causing a tax nightmare

Post by MrRibEye » Thu Mar 14, 2019 10:08 pm

Hello,

First off I'd like to say I've enjoyed reading this forum and have just spent about 2 hours reading posts about Restricted Stock Units and have got up to speed on most topics.

My filing situation is married filing jointly, we make about $400K total each year on W2 salary. I am fortunate and have RSU in a growing company, each year I'm getting about the same amount of RSU granted, let's say around $50K a year and each grant vests 1/4 per year. So every year I get 4 tranches of grants for a total of $50K (grant) + appreciation (at vest) and this year on Box 14 of my W2 the RESTK is $93K. My company takes out ~%25 to cover taxes upon vest but its not nearly enough, this is a company wide policy and they don't adjust the % for individuals.

All of my vested RSU is worth $450K and my cost basis is $225K, I have no tranches with negative cost basis, I've never sold any RSU. I'm looking at $225K of LT cap gains. I now know that about 95% of Bogleheads would say to sell that RSU at vesting and diversify it, I'm prepared to change my ways.
OK, enough back story.

My main issue over the past few years is that we owe a lot of money to the IRS every year. Last year was $24K and this year is like $35K. Paying it out of our checking account and my bonus, I don't want to do this any longer, I should be able to use my investments to pay for my investments :shock:. Our W4 dependents are 0 but it's not covering the W2 income. Also, in 2018 I sold some Vanguard funds that were too heavy in bonds/dividends and moved them over more tax efficient Total Stock Market Index. Had a ~$20K capital gains from from this sale as well.

In addition to wanting to start taking some vested RSU off the table I want to sell another chunk of Vanguard too-heavy-in-bond/dividend funds this year as well and will see more cap gains.

I have read to not let the "tax tail wag the dog" and I'm thinking that I'm going to have to be more aggressive in selling RSU to cover W2 taxes (so I don't pay from my checking/bonus) and I also need to diversify out of the RSU.

Questions:
* For my next Vanguard (sell) ---> Vanguard (buy) what's the best way to prepare to cover cap gains taxes? Should I take 25% of my sale and send it straight to my high interest savings account to cover 1099-B taxes at tax time?
* When my RSU vest should I immediately take another %25 and put in in high interest savings for tax time for W2?
* When I sell my RSU, is it safe to take %25 of capital gains and put it in high interest savings for tax time for 1099-B?


Hope this is not too long, Thanks.

H-Town
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Re: My RSU are causing a tax nightmare

Post by H-Town » Thu Mar 14, 2019 10:37 pm

What you need to understand is how to calculate your estimate income tax, true it up, and make payment if needed at the end of every quarter. It seems like you rely on your W-2 withholding tax with 0 exemption and have no idea of how much tax you would owe for the year.

This is not about RSU. They are part of your comp. You just need to learn how to calculate your tax and make tax payment accordingly.

btenny
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Re: My RSU are causing a tax nightmare

Post by btenny » Thu Mar 14, 2019 11:18 pm

I suspect you have 2 or 3 different tax issues.

1. You need to set down with a tax CPA and get him/her to calculate your tax withholding needed to cover that $400K salary. Take your spouse with you so the CPA can look at both your salaries and your W4s. I bet even at 0 deductions on your W4 you still need to have $1K to $2K extra taken out of you pay each month to cover IRS taxes and maybe $500 to cover the state. I am pretty sure you both need to file a new special W4 with your employer that shows this much withholding.

2. Each time you sell RSU stock you incur some capital gains. So you need to pay 35% or so of that gain to the IRS when you make that sale. So when you buy and then sell $50K of your RSU stock in June, you have a short term gain of $25K and you need to send the IRS $8.75K out of the RSU sale proceeds.

3. When you sell other stock or bonds from your taxable brokerage account you need to pay the tax as each sale is completed. Yep give the IRS about 35% of the profit..

Good Luck. You are doing great. But you do have a giant tax bill and you do have to pay it in a timely fashion.

AlphaLess
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Re: My RSU are causing a tax nightmare

Post by AlphaLess » Thu Mar 14, 2019 11:21 pm

I don't think you fully understand that RSU income is NOT income from investments.

It is simply WAGE income that is granted to you delayed, with some uncertain result.

So if $1 of additional wages is going to get taxed at 37%, then $1 of additional RSU income should also be taxed at 37%.

The fact that your broker does the funny thing of the following:
- on vesting day, sell ENOUGH stock to cover 22% + 6.5% + 1.45 % + state tax + whatever is simply a GIMMICK.

Here: 22% is a statutory rate. If your RSU vested grant were higher, it would be 37%.

What you should do is, on vesting day, SELL more stock to be able to pay Uncle Sam 37%, i.e., another 15%.
When you do that, your frustrations will be over.
Last edited by AlphaLess on Thu Mar 14, 2019 11:30 pm, edited 1 time in total.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

Afty
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Re: My RSU are causing a tax nightmare

Post by Afty » Thu Mar 14, 2019 11:26 pm

I set additional withholding from my paycheck of a specific dollar amount per pay period. I don’t think there is any way to get your company to withhold extra from RSU vesting as they have to follow the IRS rules for supplemental income.

nordsteve
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Re: My RSU are causing a tax nightmare

Post by nordsteve » Thu Mar 14, 2019 11:41 pm

I am also compensated partially through restricted stock grants, but my employer allows me to set the percentage that is sold at vesting time.

Alphaless' advice is correct. If you don't have enough cash to make estimated tax payments, sell more shares in your own to generate more. If you do it at the point of vesting, the marginal tax impact is minimal.

mighty72
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Re: My RSU are causing a tax nightmare

Post by mighty72 » Thu Mar 14, 2019 11:59 pm

On your W4, are you selecting married but withhold at single rate? Your employer doesn't know about your spouse income and vice-versa so will withhold at much lower rate if you select married, filling jointly.

MathIsMyWayr
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Re: My RSU are causing a tax nightmare

Post by MathIsMyWayr » Fri Mar 15, 2019 12:07 am

First, you should estimate your yearly tax obligation. RSU is added to W-2 and your payroll is not likely to withhold enough tax. You should ask payroll to withhold more tax. In a W-4 form, enter 0 in box 5 (number of allowances) and enter the desired additional amount to withhold in box 6. In my case, the federal withholding is only about twice as large as the CA state withholding with the number of allowances set to 0.

Tamales
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Re: My RSU are causing a tax nightmare

Post by Tamales » Fri Mar 15, 2019 12:23 am

At vesting the federal income tax on RSUs is calculated at the supplemental income rate (currently 22% regardless of your W4 exemptions or your tax bracket). State and FICA are also taken out. Tax is commonly paid via shares, so the 22% for federal isn't precisely 22% and may be incrementally more since they are working with whole shares (i.e. 22% plus some fraction of a share remainder). It's set by the IRS, not company policy.

You can electively add some extra dollar amount of federal and/or state withholding per paycheck via your W4, and you can change it several times a year. But you can't change the withholding for the vested RSUs

bluquark
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Re: My RSU are causing a tax nightmare

Post by bluquark » Fri Mar 15, 2019 12:43 am

Are you sure your cost basis is that low? RSU cost basis is typically the price at vesting time, not the price at grant time. You would only owe this much capital gains if the stock skyrocketed *after* it vested and you kept holding onto it. The rest of the value is just normal W2 income as others have said.

dcabler
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Re: My RSU are causing a tax nightmare

Post by dcabler » Fri Mar 15, 2019 5:55 am

If you're averse to filing quarterly, another option is to adjust your withholdings over the course of the year. Start off the year with withholdings that would have covered all of your taxes for the previous year's situation. Then adjust, maybe once per quarter or so, based on any differences that may have happened between last year and this year, if needed. Maybe your ESPP for Q1 did better than Q1 of the previous year. Maybe you sold some RSU's last year at this time and this year and made a little more/less. When you get to, say, late November/early December, make one last adjustment to cover your last 1 or 2 paychecks.

dknightd
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Re: My RSU are causing a tax nightmare

Post by dknightd » Fri Mar 15, 2019 7:32 am

Make sure you reach "safe harbor" withholding. To avoid penalties. For most that is 100% of what you paid last year. It might be different for high income earners (perhaps 110%).
You can do that by having additional taxes withheld from each pay check (specify the amount on your w4). Or you can make quarterly payments.
Once you reach "safe harbor" I'd put the rest in a savings account for tax time.
Your marginal rate is probably pretty high. Probably more than 22% they withhold. Figure out what that rate is and put it into a savings account (Or just sell extra when taxes are due).
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

SRenaeP
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Re: My RSU are causing a tax nightmare

Post by SRenaeP » Fri Mar 15, 2019 7:34 am

btenny wrote:
Thu Mar 14, 2019 11:18 pm
I suspect you have 2 or 3 different tax issues.

1. You need to set down with a tax CPA and get him/her to calculate your tax withholding needed to cover that $400K salary. Take your spouse with you so the CPA can look at both your salaries and your W4s. I bet even at 0 deductions on your W4 you still need to have $1K to $2K extra taken out of you pay each month to cover IRS taxes and maybe $500 to cover the state. I am pretty sure you both need to file a new special W4 with your employer that shows this much withholding.

2. Each time you sell RSU stock you incur some capital gains. So you need to pay 35% or so of that gain to the IRS when you make that sale. So when you buy and then sell $50K of your RSU stock in June, you have a short term gain of $25K and you need to send the IRS $8.75K out of the RSU sale proceeds.

3. When you sell other stock or bonds from your taxable brokerage account you need to pay the tax as each sale is completed. Yep give the IRS about 35% of the profit..

Good Luck. You are doing great. But you do have a giant tax bill and you do have to pay it in a timely fashion.
You don't need a CPA for item 1. The OP can sit down with the most recent year's tax return and both the OP and spouse's last paystubs then use the nifty calculator the IRS has to calculate the appropriate withholding.

https://www.irs.gov/individuals/irs-wit ... calculator

Topic Author
MrRibEye
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Re: My RSU are causing a tax nightmare

Post by MrRibEye » Sat Mar 16, 2019 11:25 am

Thanks to all for replying,

It's clear our W4 withholding (married with 0 dependents) is not sufficient, especially factoring the 2017 Tax Cuts and Jobs Act. We are decent savers (maxing 401K) but there's not a big pile of cash left over every month but there is a big pile of equity in semi-liquid vested RSU. I don't really want to mess with our monthly budget by withholding extra $1-2K per paycheck per adult, that could do some damage. I now have a relatively good understanding of our tax liability after looking at the past 2 years of taxes, I like the suggestions to either A) modify W-4 before/after vesting or B) just sell vested shares to cover taxes and file quarterly.

@SRanaeP , I've been playing around with the IRS withholding calculator, it's a good start and will compare to Turbo Tax numbers.

@btenny , I'll plan on setting aside 35% for any cap gains from RSU and from Vanguard taxable account.

@bluquark , yes, my cost basis is that low. I looked at all my vested grants and every single one has (grant value) + (stock growth) = vest value. Current value is (vest value) + (stock growth) and that's where the capital gains come from. I'm a bit concerned that If I start unloading these as most forum members recommend that I'm going to get pushed into yet another higher tax bracket. I will look at the vested grants with the least cap gains and cash them in for A) diversity and B) taxes. And then look at my overall tax bracket and see if I can unload more and have enough room not to get bumped into another bracket...

How does all that sound?

Thesaints
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Re: My RSU are causing a tax nightmare

Post by Thesaints » Sat Mar 16, 2019 11:35 am

You can use estimated tax payments. No need to increase withholdings.
When they vest, estimate your tax due using the proper rate (income, not cg) and make the relative payment to fed (and state, if needed) by the following estimated tax payment deadline. This way, you delay payment as ling as possible without eventually incurring into penalties.

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ClevrChico
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Re: My RSU are causing a tax nightmare

Post by ClevrChico » Sat Mar 16, 2019 8:00 pm

As others stated, you need to pay estimated tax. I think it's easier than trying to tinker with withholding. Here's a handy link:

https://www.irs.gov/payments

You can also create an account on the site that allows you to see payment history over several years, but it's not required to make payments.

Topic Author
MrRibEye
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Re: My RSU are causing a tax nightmare

Post by MrRibEye » Thu Apr 09, 2020 9:56 pm

Hello again,

I wanted to provide an update 1 year later:

- Reviewed the Tax calculator: https://www.irs.gov/individuals/tax-wit ... -estimator
- Added a significant amount of federal withholding from both our paychecks.
- RSU's continued to be withheld at the company standard 22% Fed taxes
- Sold some vanguard funds at a profit and I set aside 24% for capital gains (in cash), also got rid of some high dividend paying Vanguard funds.

Just finished our taxes, for 2019 we owed $7,000 in taxes. I covered that using the cash set aside from the proceeds from the mutual fund sale. I consider this a major success over 2018!

I will say with the increased Fed withholding of about $1,740 per month our checking account balance was basically flat or slightly negative over the year. Not a big fan of that, I need to sell RSUs.... :-) Our stock value increased 82% in 2019, tough to sell...

Cheers.

anon3838
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Re: My RSU are causing a tax nightmare

Post by anon3838 » Thu Apr 09, 2020 10:45 pm

OP,

My comp works exactly the same as what you've described. As others have suggested, I setup additional withholdings taken from my salary.

I run my numbers through taxcaster a few times throughout the year to make sure I've covered taxes...from there I change my withholdings, and/or send in quarterly tax payments.

Also, I used to hold RSUs after vesting, but now I sell immediately and get those funds invested in my taxable account since I know I will hold those assets for a very long time/forever.

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grabiner
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Re: My RSU are causing a tax nightmare

Post by grabiner » Thu Apr 09, 2020 10:54 pm

ClevrChico wrote:
Sat Mar 16, 2019 8:00 pm
As others stated, you need to pay estimated tax. I think it's easier than trying to tinker with withholding. Here's a handy link:

https://www.irs.gov/payments

You can also create an account on the site that allows you to see payment history over several years, but it's not required to make payments.
You can do the same thing with withholding as well. On line 4c, you can request extra withholding for each pay period, so if you need $19K withheld and there are 19 pay periods left this year, you can enter $1000.
Wiki David Grabiner

drk
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Re: My RSU are causing a tax nightmare

Post by drk » Thu Apr 09, 2020 10:56 pm

I pay quarterly estimated taxes with my credit card, and I get more in cash back than I pay in fees.

SnowBog
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Re: My RSU are causing a tax nightmare

Post by SnowBog » Thu Apr 09, 2020 11:22 pm

Great job! I was in a similar boat the past several years - could never figure out why my April tax bill was so high...

Besides the RSU - also pay attention to:
  • Bonus - typically a flat tax rate - less than your tax obligations
  • Non-salary income such as dividends, interest, gains in taxable, etc. - besides the "normal" taxes, you'll likely owe NIIT as well
  • ESPP "Disqualified Distributions" - which maybe "double counted" - resulting in over payment of taxes (which is easy to miss)
On the ESPP side - if you sell shares right away (I think prior to 18 months - but I sell mine right away so I'm not exactly sure) - any "discount" on your purchase is considered a gain. I believe employers are required to track and report these "disqualified gains" on your W2 (at least mine does). And your brokerage account will also report these gains. So its really easy to end up double counting those gains - and paying more taxes than needed.

As I'm sure you know, there's an increased risk by having a large % of your assets invested in the same organization that pays your salary. If that organization falls on hard times, you could lose a large chuck of your savings at the same time you lose your job.

On that note - don't think about selling your "new" RSU vests (and/or your ESPP) as increasing your taxes. At the time they show up in your account - you basically have $0 tax liability based on any change in value. It doesn't matter if your grant was at $10 - and the vest was worth $1000 - when the $1000 vests - the full $1000 is considered income. So if you sell the $750 left (after 25% were sold to "pay taxes") - you'll owe exactly the same amount of taxes had you not sold. (More specifically - let's say the vest was at $100/share - if you sell at $100/share this is true. But if you sell at $101/share - then you'd owe taxes on that $1 gain.)

This misunderstanding (and my lack of awareness of index funds as a "better" choice) held me back - and resulting in my employer stock becoming a larger percentage of my assets than I should have allowed it to become.

SnowBog
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Re: My RSU are causing a tax nightmare

Post by SnowBog » Thu Apr 09, 2020 11:30 pm

grabiner wrote:
Thu Apr 09, 2020 10:54 pm
You can do the same thing with withholding as well. On line 4c, you can request extra withholding for each pay period, so if you need $19K withheld and there are 19 pay periods left this year, you can enter $1000.
+1 I do this as well...

One other tip - if you have "large" earnings, you can potentially use that to shift more to pay taxes as well. I typically get paid a large payment (larger than normal paycheck) in Nov. Last year I estimated my taxes prior, and then increased my withholding amount by what I thought I still owed - so it came out of my "extra" income. Just make sure to change your withholding back to "normal" (and ensure you understand the timing of these changes with your paycheck).

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