When it comes to understanding your compensation package, it’s crucial to know just how much makes it to your pocket. Restricted stock units (RSUs) are a great form of compensation when you work for major tech giants like Amazon and Microsoft, but you must understand how these benefits affect your taxable income.

What can you expect from the RSU tax rate in Washington, where these two major companies are headquartered? And more importantly, how might the new capital gains tax in Washington state affect those RSU tax rates?

Read on for everything you need to know. 

RSU Tax Rates in Washington

The first and most significant aspect of taxation on RSUs in Washington state is the new capital gains tax. This capital gains tax has the potential to be struck down, but until this becomes official, taxpayers should be aware that they will need to include this filing in their 2022 year-end taxes. 

In a nutshell, the capital gains tax is a 7% tax on gains realized from the sale of long-term assets, which are those you have held longer than one year. This Washington-specific tax is in addition to the 15% or 20% capital gains tax that most people will pay to the federal government, and the 3.8% Net Investment Income Tax (NIIT) that is payable if you make over $250k and are married filing jointly, or $200k as single and head of household. 

Not everyone will be subject to this Washington state capital gains tax though. Only those who earned more than $250,000 in gains will be taxed at the state level. Note that this is the gain that you have earned and not necessarily the price at which you sold your RSUs. You only pay this 7% Washington state capital gains tax on the money earned above and beyond this $250,000 mark. 

Example 1: You sell $300k of Amazon stock, realizing a $100k long-term capital gain. You will not pay the additional 7% tax to Washington state (but you will still pay tax at the federal level). 

Example 2: You sell $500k of Microsoft stock, realizing a $300k long-term capital gain. You will pay an additional 7% tax on $50k (the first $250k of long-term capital gains is taxed only at the federal level, with the remaining taxed at the federal and in Washington state, bringing this top tax bracket to as high as 30.8%!). 

There is some good news about your RSUs being taxed as income though. Namely, there is no income tax in Washington state. This can spell major savings for you, but you are not out of the woods yet. You will still owe to the federal government, as RSUs are subject to federal income taxes. 

For the 2023 year, there are seven federal income tax brackets that you may fall into.

2023 Tax Brackets For Single Filers:

2023 Tax Brackets For Married Filing Jointly: 

How Does the Washington Tax Rate Affect Remote Workers? 

Generally speaking, your tax rate is based on the state where you perform the work. This means that if you work for one of these companies headquartered in Washington state and you live in a neighboring town, you will not be liable for state income taxes on vested RSUs. 

However, if you work for Amazon or Microsoft while living in a different state, you will be taxed based on your home state’s tax rates. Be sure to consult an accountant to make sure you are up to speed on what your home state requires.

When Are Taxes Due? 

Remember, your RSUs have no taxable value until they officially vest, which usually happens over 2-4 years. Some companies grant a certain percentage of their RSUs in the first year, the second year, and so on. Microsoft’s vesting schedule, for example, vests over the course of five years at a rate of 20% per year. Until they officially vest, you do not have any tax liability for your RSUs. 

You do have a few options for handling this. Generally speaking, the default is to “sell-to-cover” which means you’ll sell a portion of your vesting shares to pay for the federal income tax due at vest.

Do you typically have a large tax bill owed when you file for taxes? This is likely because your default sell-to-cover is set to 22% federal taxes. If you earn a high income, this is nowhere near enough tax which is why you owe so much when you file each year. Most companies allow for you to adjust this withholding amount. Contact your HR or stock plan department to find out how to change this if you’re unsure (or ask us).

A financial planner with Consilio Wealth Advisors can help you make the most of this income and keep taxes to a minimum, and help you understand how your stock compensation fits into your planning picture. 

Tips for Reducing Your RSU Tax Rate in Washington

If you want to minimize what you owe to the government from your RSUs vesting, there are a few things you can do. Here are our top four tips to reduce taxes on RSU income. 

1) Adjust Tax Withholding

Instead of opting for the standard 22% federal tax withholding rate, you may choose to bump your withholding up to cover the cost. Your company may sell more of your RSUs and take the cash from those shares to help cover the cost of your federal tax bill. 

2) Sell Stock ASAP

One of the best ways to eliminate your capital gains taxes is to sell your shares immediately – as in, the very same day that they vest. There will not be any time for them to lose or gain value, thus negating the need for capital gains tax. 

3) Tax Deductions

One way to make the most of your RSU income is to maximize tax-deductible accounts. For example, you may want to contribute the maximum amount to a pre-tax 401(k), an account that allows you to contribute up to $22,500 per person annually (in 2023). Both Microsoft and Amazon offer 401(k)s that you can max out first.

Another alternative is to invest in a health savings account (HSA). An HSA allows you to max out pre-tax deductions with a high-deductible health insurance plan and allows you to take tax-free distributions for medical expenses. 

4) Charitable Giving

Many people like to feel that they are doing their part for a better tomorrow. Why not donate some of your income to an organization that you can support? You can either donate shares directly to a charity of your choice or donate to a donor-advised fund. Consult with Consilio to learn more about which option may be the right fit for your generosity.

Get Expert Guidance

Tax laws can be extremely complex. You need expert advice to make the most of your RSUs and still remain compliant with government taxation at the end of the year. 

If you work for a major tech company that gives RSUs as part of a compensation package, lean on Consilio to help manage your taxes. Contact us today to learn more about how we can maximize your earnings from RSUs!  

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