RSU income for tech employees tends to be a large part, if not the biggest part, of their total annual income. This may put stress on monthly cash flow when it comes to maxing out employer benefits such as pre-tax and after-tax 401(k), ESPP, HSAs, etc. This stress can often be compounded come April the following year, only to find out you have to pay a hefty tax bill. Below are our top 4 recommendations for managing your tax bill due to RSU income.

1. Adjust Your Tax Withholding

The US uses a progressive tax system so it’s important to be aware of the difference between what your highest marginal income tax rate is and what your effective tax rate is. Marginal is the rate you pay on the next dollar of earned income, whereas effective tax rate is the average rate you pay on every dollar of income.

Example: A single filer who earns $150k of income has a marginal tax rate of 24% but an effective tax rate of 18.01%. Below are some examples to help you gauge how adjusting your withholding can help you plan for next year’s tax season.

Single                             Marginal                Effective Rate

$150k income             24%                        18.01%

$300k income            35%                        25.05%

$450k income            35%                        28.37%

$600k income            37%                        30.24%

$750k income            37%                       31.59%

$1M income               37%                       32.94%

Married                         Marginal                Effective Rate

$150k income             22%                        12.65%

$300k income            24%                        18.01%

$450k income            35%                        21.73%

$600k income            35%                        25.05%

$750k income            37%                       27.30%

$1M income               37%                       29.72%

*The above figures are just estimates, effective rates vary given your unique deductions. Please consult your tax advisor.

The default Federal tax withholding rate for many tech firms is 22%. Given where your income falls on the chart above, you may want to adjust your sell-to-cover election, if your company allows. Many companies allow for this, but some don’t. If you’re unsure, reach out to your HR department or stock plan department to ask.

When you increase your tax withholding, the payroll department will simply sell more shares at each vesting period, withhold that cash for your federal tax payment, and report a higher amount of withholding on your W-2. 

Withholding more of your RSU income will also reduce the amount of interest and penalties the IRS charges for underpayment of taxes.

2. Sell Stock Right Away

One of the most common misconceptions we hear from clients is that if they sell their stock as soon as they receive it, they will pay short-term capital gains taxes. In reality, this can be the most tax-efficient time to sell your RSUs.

On the day that your shares vest, the shares you receive are treated as ordinary income. Your employer will sell some shares to cover your federal tax withholding (aka “sell-to-cover”) and will deposit the remaining shares into your account. 

The price of the stock on the day that it vests is now the cost basis for those shares. If you immediately sell the shares, the stock has not yet increased in value (or decreased), thus there is no gain to pay capital gains taxes on. 

3. Maximize Your Tax Deductions

With the constantly changing prices of tech stocks, it can be hard to control or predict income. You can, however, take charge of your tax situation by maximizing all deductions available to you. Here are a few ideas to consider when planning out your tax situation throughout the year.

Max out Tax-Deductible Accounts

• Pre-tax 401(k) - For the tax year 2022, you are eligible to contribute up to $20,500 into your pre-tax 401(k), which directly reduces your taxable income. If both spouses are offered a 401(k), that’s a total of $41k in income tax deductions for the tax year 2022. 

• Health Savings Accounts (HSA) - If you have a high-deductible health insurance plan, you can max out your Health Savings Account (HSA). HSA contributions are made pre-tax, which helps reduce your taxable income. The HSA is one of the most tax-advantageous accounts available – contributions are made pre-tax, growth is tax-deferred, and distributions are tax-free if they are for medical expenses. For the tax year 2022, individuals can contribute up to $3,650, and families $7,300. 

Harvest Losses First

If you opt to sell shares, be sure to calculate which shares are going to be the most beneficial to your bottom line. It can be better to sell stock at a loss (aka “tax-loss harvesting”) vs. selling highly appreciated stock that comes with a huge tax bill.

Example – Let’s say that you had GOOG RSU’s vest at $125/share and it’s currently trading at $100/share. You can use the $25 loss to write off gains you may have in other taxable investments. If you have more losses than you do gains, you can also write off up to $3,000 in losses against your earned income. And if your losses exceed gains and the $3,000 income deduction, you can carryforward unused losses forward into unlimited future tax years. 

Tax-loss harvesting is such a great benefit that our investment operations team is constantly looking for losses to harvest for clients. We believe that you can turn an investment loser, into a tax winner. 

Tax Bunching

Under the Tax Cuts & Jobs Act (TCJA) many itemized deductions were restricted or eliminated. As a result, roughly 11% of the US population itemized their taxes in 2018, compared to 31% in 2017. With no further legislation, the TCJA will sunset on December 31st, 2025, at which point we’ll revert back to previous tax brackets and itemized deductions. 

One helpful strategy that not many people take advantage of is called Tax Bunching, wherein you alternate years between taking the standard deduction and itemizing by planning deductible expenses in the year you itemize. If you are scheduled to have a high-income tax year that pushes you to a high tax bracket, it might be beneficial to use tax bunching for that tax year. Here are the primary deductions you should look for if you hope to itemize.

• Mortgage Interest – This is the most common one that people see for owning a home. You may deduct interest on up to $750k of the mortgage balance. 

• Property Taxes – Instead of paying property taxes throughout the year, wait until January to pay the previous year's tax liability AND pay this year’s tax liability later in the year in December. You’ve effectively paid two years of property taxes in a single tax year, and have upped the amount you may deduct on your taxes. You will want to check with your local municipality for eligibility. It is extremely important to note the $10,000 cap on all State & Local taxes (SALT cap), which might limit how much you can deduct.  

• Charitable Contributions – You can deduct up to 50% of your AGI if contributions are made to qualified organizations. We have outlined a number of these strategies below. 

• Medical & Health Expenses – You may deduct medical expenses that exceed 7.5% of your AGI. This would be for planned major expenses such as surgeries, braces, etc. 

4. Make Charitable Contributions

Many clients opt to support the organizations, places of worship, schools, etc. that are closest to their hearts. All too often we see clients writing checks or donating cash, not knowing that their money could be going so much further with the causes they support. After learning about the next two strategies many of our clients have vowed to never donate cash again.

Donate Low Basis Shares - Not Cash

That’s Right. You can gift shares directly to the non-profit organization of your choice and receive a tax deduction for the fair market value (FMV) of the shares. Provided the non-profit is a 501(c)(3) organization, they do not have to pay any taxes when they sell the stock that you have donated. As a result, it is often most advantageous for clients to donate the shares with the lowest cost basis, which helps to increase the average cost basis (and reduces the tax liability) on the remaining shares they own.

For example – let’s say you want to make a donation to United Way and have twenty shares of AMZN stock to fund the donation. The stock is currently priced at $150 per share, and your cost basis is $50. If you sold the stock and donated the cash, you would have to pay taxes on the $100 capital gain per share. Assuming a 15% long-term capital gains tax rate, you would have to pay $300 in capital gains taxes which reduces your donation to $2,700. If you donate the stock directly to United Way, they don’t pay any capital gains tax as a 501(c)(3) and you receive a tax deduction for the full $3,000 FMV. Win-win.

Donor-Advised Fund (DAF)

The IRS currently limits charitable donation deductions to 50% of the taxpayer’s AGI. Many of our clients like to make smaller & consistent annual donations to their preferred organizations - $500, $1k, $5k, $10k, etc. It may not make a huge difference to your tax bill to donate $1k every year, especially if you are scheduled to have a very high taxable income one year, or if you don’t itemize deductions on your return. What if you could make a large $50k donation this year, take the deduction, and still gift out $5k/year over the next 10 years? A donor-advised fund is the account that allows you to do it. 

Let’s say you have a concentrated MSFT stock position and a year with unexpectedly high income due to a home sale, special stock award, or a large stock sale. A year like that could justify taking additional tax deductions to reduce your bill. The DAF is an account that is registered as a non-profit organization. When you transfer shares directly into the account, you receive a deduction for the donation. 

Although the DAF provider controls the money in the fund, you get to recommend which investments to use. You are then able to make distributions from the account to any other non-profit organization, over any time period of your choosing. Some clients want to see their investments grow to a certain point before finalizing a distribution, and others need more time to research the non-profit of their choosing but also want to realize a tax benefit in a specific year. Many providers will have a minimum annual distribution amount that is required. 

Need help?

It’s important to work with a financial planning firm that specializes in your unique compensation structure. It makes your life easy so you don’t have to explain all the intricacies of your company's benefits! Also, make sure that the firm you’re working with is a fiduciary, and make sure your advisor or advisory team consists of CERTIFIED FINANCIAL PLANNER™ professionals. 

That’s why you should consider working with Consilio Wealth Advisors while creating a plan for your Amazon RSUs. Consilio specializes in working with tech professionals at Amazon and Microsoft, and we make a point of communicating clearly and simply (without the jargon) with our clients. If you’re looking for financial professionals who see the people they work with as people, set up a free intro call.

DISCLOSURES: 

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.