My RSU are causing a tax nightmare

[MrRibEye]

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 . 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]

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]

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]

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.

[Afty]

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]

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]

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]

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]

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]

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]

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]

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).

[SRenaeP]

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

[MrRibEye]

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]

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.

[ClevrChico]

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.