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It's actually worse than that for RSU holding employees. The taxation event occurs on share release for RSUs, at a cost basis of the price on release. In many c

by yojo 8y ago

It's actually worse than that for RSU holding employees. The taxation event occurs on share release for RSUs, at a cost basis of the price on release. In many cases, that will be the day of the IPO, at the IPO price. If the share price falls over the lockup period, employees end up owing tax at a share price higher than they are able to sell. Some of that is usually offset by the company withholding some of the released shares for taxes, but the current withholding rate is substantially under most engineers' marginal tax bracket. It amounts to a ~10% extra tax penalty on the share decline.

philwelch 8y ago
When you sell the RSU, can't you use that cost basis to claim a capital loss, reducing your taxable income enough to cancel out the tax disadvantage? The disadvantage being that you can't claim a capital loss until you do sell.
- toast0 8y ago
  Yes, it will be a capital loss, but you can only cancel $3,000 worth of capital loss against ordinary income per year. If you had enough RSUs to make insufficient tax withholding a meaningful issue for you and the stock price is significantly down by the time your lockout expires, it might take several years to offset the losses against your income. On the other hand, having a stash of capital losses to carryover makes rebalancing easier in the future.
toast0 8y ago
> current withholding rate is substantially under most engineers' marginal tax bracket RSUs are withheld at Federal bonus rates, which seemed pretty reasonable (it's 25% until your total taxable comp from an employer hits $1M in the tax year, and then it jumps to 39.6%); and California equity statutory rates, which is the second to top marginal rate, which works out right, unless you made enough to pay the mental health tax. Although, given that state tax isn't deductible anymore, perhaps 25% isn't nearly enough at the federal level anymore?
- yojo 8y ago
  That's roughly inline with the 24% federal tax bracket covering $82,500-$157k (single filer). Many engineers are in the 32% or 35% bracket. It's definitely in the realm of "high quality problem"
- smkellat 8y ago
  State and Local Tax deduction is limited to $10,000. It isn't eliminated.
  - yojo 8y ago
    True. But with the increased standard deduction there are many more scenarios where you don't end up itemizing deductions, in which case it is effectively 0
  - toast0 8y ago
    In the context of a windfall, limited to $10,000 is effectively eliminated; especially in the context of 25% withholding not being enough. Realistically, since the standard deduction is way more than SALT deduction plus the maximum mortgage deduction, few people are going to end up deducting those, unless they've made a lot of charitable contributions or had a lot of medical expenses in a given year. The analysis of 2018 tax return trends is going to be very interesting.

by yojo 8y ago

philwelch 8y ago

When you sell the RSU, can't you use that cost basis to claim a capital loss, reducing your taxable income enough to cancel out the tax disadvantage? The disadvantage being that you can't claim a capital loss until you do sell.

toast0 8y ago
Yes, it will be a capital loss, but you can only cancel $3,000 worth of capital loss against ordinary income per year. If you had enough RSUs to make insufficient tax withholding a meaningful issue for you and the stock price is significantly down by the time your lockout expires, it might take several years to offset the losses against your income. On the other hand, having a stash of capital losses to carryover makes rebalancing easier in the future.

toast0 8y ago

> current withholding rate is substantially under most engineers' marginal tax bracket RSUs are withheld at Federal bonus rates, which seemed pretty reasonable (it's 25% until your total taxable comp from an employer hits $1M in the tax year, and then it jumps to 39.6%); and California equity statutory rates, which is the second to top marginal rate, which works out right, unless you made enough to pay the mental health tax. Although, given that state tax isn't deductible anymore, perhaps 25% isn't nearly enough at the federal level anymore?

yojo 8y ago
That's roughly inline with the 24% federal tax bracket covering $82,500-$157k (single filer). Many engineers are in the 32% or 35% bracket. It's definitely in the realm of "high quality problem"
smkellat 8y ago
State and Local Tax deduction is limited to $10,000. It isn't eliminated.
- yojo 8y ago
  True. But with the increased standard deduction there are many more scenarios where you don't end up itemizing deductions, in which case it is effectively 0
- toast0 8y ago
  In the context of a windfall, limited to $10,000 is effectively eliminated; especially in the context of 25% withholding not being enough. Realistically, since the standard deduction is way more than SALT deduction plus the maximum mortgage deduction, few people are going to end up deducting those, unless they've made a lot of charitable contributions or had a lot of medical expenses in a given year. The analysis of 2018 tax return trends is going to be very interesting.