What Was Your RSU Tax Bill Last Week?
RSU taxes are tricky. If you have RSUs and did not make estimated quarterly tax payments throughout 2021, there’s a high likelihood that you had to pay a substantial tax bill over the past few days.
I received a tremendous amount of responses to the RSU note I sent last week. No surprise: many of the comments were tax-related.
“The taxes that I have to pay on my RSUs really stings!”
“I already paid taxes on my RSUs, why did I have to pay more?”
“Last week really stunk!”
RSU taxes are complicated. However, with some tax planning the experience will be easier and the tax surprise can be avoided. Also, there is a possibility that you could lower your taxes with some of the techniques outlined below.
RSU Withholding Taxes
Withholding taxes for federal income tax, Social Security tax, Medicare tax, and state and local income taxes (where applicable) are withheld at vesting.
If you earn less than $1 million per year, your employer will most likely withhold taxes at the 22% rate. For example, you are single and earn $250,000, you are in the 35% marginal income bracket. If the company only withholds 22%, then there is a 13% shortfall on the amount of federal taxes you owe to the IRS. Imagine your compensation of $250,000 includes $50,000 in RSUs. You will owe an additional $6,500 ($50,000 x 13%) of federal taxes on the RSUs.
One way to avoid this surprise tax bill is to make estimated quarterly tax payments throughout the year. Yes, you will have to pay the same amount. However, building up cash and paying the taxes over the course of one year feels a lot better than getting a $6,500 tax bill on April 15th, and then scrambling and stressing in order to come up with $6,500 in 10 days. And it could save you from paying penalties and interest!
Max Out 401(k) and HSA
Put additional money into your 401(k) to reduce your total taxable income, which could reduce your tax bracket. For 2022, the maximum employee contribution limit is $20,500, for those younger than 50. If you are 50+, you can contribute $27,000. This won’t reduce your taxes on the RSUs that are vesting, but it could lower your taxable income amount.
If you have a high deductible health insurance plan, set up a Health Savings Account (HSA) to put aside pre tax money for medical expenses. In 2022, the contribution limit for individuals is $3,650 and $7,300 for families (with an additional $1,000 catch-up for those 55+). This strategy is similar to maxing out your 401(k). If you have a family and max out both the 401(k) and HSA, you can reduce your taxable income by $27,800. There’s a good chance that this can reduce the taxes you have to pay on your income.
Charitable donations are another option to reduce the RSU taxes. For instance, the first choice is to donate your vested RSUs outright to a qualified charity. Alternatively, the second choice is to sell the RSUs immediately and donate a portion of the proceeds. The donation you make will help lower the income you received from the vested RSUs. This option can be very powerful in a year when a large amount of vesting RSUs will bump you into a higher tax bracket.
RSUs and the tax implications surrounding them are complex and involved. Please feel free to reach out with any questions you may have. You can set up a free consultation, and my email is [email protected]