Over the past several years, we have seen many varieties of equity compensation structures for both C-level executives and key employees at some of the most well-known and successful companies on the West Coast. The Companies we work with encompass publicly-traded companies who have been publicly-traded for a long time, recently when to IPO or are getting close to an IPO. In all situations, there are immense opportunities for planning and strategy around minimizing tax liabilities on an annual basis.
In our last post, we touched on ISO’s. This week we will detail Restricted Stock Units (RSU’s)
Restricted Stock Units are typically subject to a vesting schedule. A key component is the fact that they become compensation to the holder at the FMV of the units that vested on that date. The employer will also sell certain shares to make withholding tax payments on behalf of the employee which is reported on the W-2.
It is important to consider a couple of things in this process:
1. What is my cash- situation? – Depending on where your income has been historically and how much you are receiving in stock you would find yourself pay taxes at the top rates (39.6% Federal and 0-13% in your state). It is important to understand where your projected tax will fall so you can take it into consideration for planning purposes.
2. Do I hold for future LTCG? – Your holding period starts when the stock vests, which means you would need to hold the stock for one-year to achieve long-term capital gain treatment on any additional appreciation and if you have a crystal ball on where the stock will be in twelve months (or you have unbridled devotion to your employer) you may want to hold everything. If you received Apple stock or Amazon stock when they went to IPO years ago and never touched or sold everything, you would be doing just fine.
3. Do I sell? – The benefit in selling immediately at vest is that you avoid any capital gains or losses as your basis is the FMV on vest date and likely the stock price hasn’t fluctuated significantly. You then have the cash available to invest elsewhere or spend all of the money on toys, cars and fine art. All joking aside, it gives you flexibility and to leverage against having all of your eggs in one basket and to begin planning around a long-term strategy for the future.
Planning Opportunity – In our last post, we talked about stock options and their AMT considerations. If you have both ISO’s and RSU’s, you may be able to exercise options with no AMT tax hit if you are in a high-tax year due to RSU’s vesting.