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What I wish I knew about ESPP and RSUs sooner
- busterarm 3y agoRSUs aren't "extra" pay though. They are shares in lieu of cash compensation. At some companies you can negotiate to get all of your RSU compensation as cash instead and that money will be part of your base compensation, which will make your taxes simpler and might be better for you in the long run.
- Atrix256 3y agoIf you sell your rsus when they vest its the same result
- the-grump 3y agoIt's not. RSUs are taxed in the state in which they're granted, at least at my company. Not where they vest.
- loeg 3y agoUh, they're income to the employee in the state they work when they vest. California has a very weird and ambitious law that tries to claw income from grants made while the employee worked in California (even long after the employee has moved out of the state), but that is not the norm.
- tolbertam 3y agoCan attest to this. I moved away from California in 2021 and continued to work for my employer. I pay taxes on RSUs that were granted in California as they vest in both California and my new home state. My state (and I expect most others) has a tax credit for taxes paid in both states. If anyone finds themselves in this situation, I would highly recommend hiring a tax advisor who can help you navigate this.
- brewdad 3y agoIs this for grants that were initially made prior to 2022? Otherwise, I can't possibly see how California has any claim to that money.
- sgerenser 3y agoYes this is only for grants made while you were working in California. But even if the vest happens years later and you’ve lived in another state for years, California still wants their cut.
- tolbertam 3y agoThat's correct, only for grants that were made while I was living in California. Any subsequent grants I receive in my new home state are not subject to California state taxes.
- busterarm 3y ago> My state (and I expect most others) has a tax credit for taxes paid in both states. I'm in the same situation but NY but opted out of this credit because for the amount I would get back on double-taxation, NY state wanted to tax me an additional 10x (and more than 50% of the value of the sold shares...) as much filing a return in their state even though I didn't earn any income there. Plus an underpayment penalty. I just skipped the NY return because I didn't earn any money there and shouldn't have to file a return with the state. Fuck them.
- stouset 3y agoIt's not really weird. California has a huge problem with people coming here to strike it rich, doing so, then abandoning the state in order to avoid taxes on the money they made while working here. They're not exactly out of line in asserting that you earned that income while living in the state, even if you "happen" to move elsewhere just before selling your ISOs/RSUs.
- hamburglar 3y agoBut if you move somewhere else before they vest, you earned the money on the vest date, not the grant date. My four year grant is not “earned” the day I sign it. It’s incentive for four years of work.
- stouset 3y agoYes, but as far as I know that’s not the type of situation CA is generally chasing people down over. Maybe there are exceptions but I do agree with you that in typical situations it should be about when the equity vested, not when it was granted.
- ojbyrne 3y agoMy reading of the tax code in California is that the tax is pro-rated over the time you were resident in CA. E.g you get a grant with a 4 year vest in California and move away after 1 year: 1st year California gets all the calculated tax, second they want 1/2, 3rd year 1/3, 4th year 1/4. Roughly like that (it’s actually counted in days).
- loeg 3y agoUnvested grants aren't income. California is wrong. This is just a middle finger to people leaving the state, a group that conveniently happens to have no representation in the state government.
- randerson 3y agoNew York too. They tax based on the number of days spent in New York divided by the number of days between grant and vest dates.
- adastra22 3y agoI don't know of any state that does that. What state is your company in?
- busterarm 3y agoNew York does this. I'm remote, out of state for years and still have to pay taxes on my RSUs to NY.
- refurb 3y agoThey are split automatically at my company. If 4 year vesting, you live 2 years in CA, 2 years in MI, 50% of the income is counted as income for each states taxes.
- lopkeny12ko 3y agoI have never heard of any company who would entertain substituting RSU compensation for cash. If you asked your Google recruiter for 500k in cash instead of 250k in base and 250k dollars in annual RSUs, you'd be laughed out of the room.
- RobRivera 3y agoIirc Netflix did this
- skellington 3y agoNetflix is the one notable exception. But they are the exception.
- xvector 3y agoTikTok does it too.
- eloisant 3y agoThey don't offer you to replace RSU with cash, they don't offer RSU at all to anyone, but give much higher salaries instead. That's not the same.
- deleted 3y ago[deleted]
- busterarm 3y agoIt's not FAANGs that do this, it's slightly smaller companies. I have done this. My current employer offers this option if you ask for it. Also when Facebook was first picking up Data Scientists I know people who were negotiating 500k all cash packages.
- zdw 3y agoLet's say you were going to donate stock to charity from either of these sources (ESPP, RSU) Is there any way to avoid taxation when it becomes yours to donate, or to be refunded the money used to pay taxes that you no longer owe as you don't own the stock?
- loeg 3y agoNo.
- joshuamorton 3y agoYes, you'd set up a Donor Advised Fund, transfer the stock to that fund, and sell it from within the fund, or donate the stock directly to an large established nonprofit that is capable of accepting donations of stock.
- skellington 3y agoI don't think that's what the person is asking. He's asking if you can avoid ALL taxes on RSUs by donating all of it. And the answer is NO. You can't transfer an RSU grant and when it vests, the taxes are automatically paid for by the company (RSU manager) selling 33% (varies) of the shares. Once you have the shares you can do the above and can avoid taxes on the gains of post-tax shares.
- joshuamorton 3y agoMaybe, but > donate, or to be refunded the money used to pay taxes that you no longer owe as you don't own the stock? Would still be yes, as you can deduct the value of the stock, assuming you're over the standard deduction.
- skellington 3y agoTrue. It's a discount on the tax, but you don't get it all back. So, RSU = 100K (33K taxes), you get 67K after initial taxes. You donate 67K, you get 22K in tax credit. Government gets 11K in taxes even though you didn't see one penny from the RSUs.
- vgivanovic 3y agoThe demofox.org page I see has blue text against a black background - unreadable. No other web page I can recall has this color combination.
- olliej 3y agoRegarding this quote on ESPP programs: > If the company does poorly, the employees with ESPP will lose, and get their money back at a reduced rate, which is great for the company, effectively having to pay less payroll if things are going poorly. This doesn't match my experience. I've obviously not worked at every country on earth/in the US but the ESPP programs I have used have always been a 15% discount on the low point of either the start or end of the ESPP period. e.g. it's a near guaranteed 15% gain (obviously stock market so no such thing as a real guarantee[1]) because even if the stock price has dropped, because you're still getting the stock at a discount on the reduced price. Assuming you have no reason to believe there's a chance of a sudden 15% (or whatever) stock price drop, your employer is publicly traded (and has trade volume), and they are doing "vs lowest price", ESPP is one of the lowest risk ways of getting a 15% gain on your funds. [1] e.g. because stock sales/purchases are still inexplicably not instantaneous it's conceivable something terrible could happen in the multiday period between purchasing your shares at a discount, and being able to sell them.
- kshacker 3y agoEchoing your thoughts and expanding on them. The multi-day period is usually "1" trading day. You get shares on a Monday, you can sell them next day on the Tuesday. You get shares on a Friday, you can sell them next trading day on the Monday. You get shares on a Friday before a Monday public Holiday, you can sell them next trading day on the Tuesday. Of course there could be exceptions, but that's how it generally works, and basically locks you in from the time of allotment till the time the market opens. So the risk you have is of calamitous events happening during that time - Black Monday or something like that, but otherwise it would be rare for markets (company stock) to fall 15% and the entire ESPP allocation to be a net loss.
- skellington 3y agoYeah basically it's 15% worse case if your company stock is on a consistent downward or sideways trajectory. And 15%+ is the stock is generally rising. There is always a small black-swan chance I guess. In all the places I've worked, the shares are purchased at the close of the trading day and available to sell by the next morning.
- Apreche 3y agoThe fact that this persons uses the term "push you into a different tax bracket" suggests they don't understand how tax brackets work.
- hippich 3y agoI am not finding anything suggestive about it, except repetition. Tax brackets awareness is important when you have more thing going on besides your w2. Especially for things that can't wait till tax return due date, like Roth conversion.
- deleted 3y ago[deleted]
- stingrae 3y agothe concept of additional income "push you into a different tax bracket" is a misnomer. Only the income above the bracket line gets taxed at the higher rate. There isn't a reason to avoid getting more income in a given year unless you have a way to defer it (like some retirement accounts allow)
- rrdharan 3y agoThis is not true in New York State.
- wtallis 3y agoAre you saying New York has an income tax that does not feature marginal tax rates?
- rrdharan 3y agoYes, I am saying that.
- jamie_ca 3y agoNew York state government website seems to disagree https://www.tax.ny.gov/forms/current-forms/it/it201i.htm#nys-tax-rate-schedule https://www.tax.ny.gov/forms/current-forms/it/it201i.htm#nys...
- jmvoodoo 3y agoI am not an accountant or attorney, so you should do all of your own research. However any discussion or information about RSUs that doesn't mention an 83b election is at best incomplete.
- zrail 3y agoYou can't make an 83b election for RSUs. RSAs yes. Option grants for sure. RSU taxation is very straightforward compared to those. They count as W-2 income when they fully vest and turn into shares. There isn't anything to elect as 83b because they don't get any special tax treatment after that vesting date.
- cjbprime 3y agoYou appear to be confusing RSUs with stock options.
- jmvoodoo 3y agoActually it looks like RSAs. I didn't even apparently know that RSUs were different as I've always received RSAs and thought they were the same thing (and in fact they had been called RSUs, but the structure looks like RSAs as defined here)
- PopAlongKid 3y agoA subtle point that confuses many: 83(b) election only applies to property that has been transferred to you but not vested.
- jjav 3y ago> However any discussion or information about RSUs that doesn't mention an 83b election is at best incomplete. You can't 83b RSUs.
- beau_g 3y agoThis article doesn't seem to say anything beyond the obvious, but here's what I wish I knew - - Be conscious of what is going on with sell to cover on RSUs if you go that route, especially shortly after you joined a company or vesting a new grant these will also be sold at short term gains (if the stock went up), also going towards you taxable income. This is an easy way to end up with a surprise monster tax bill. I prefer to always pay the taxes in cash if possible to make everything simpler. - Make sure to plan to pay quarterly taxes if the stock is rising/you want to sell a fair bit to not get stuck with both a big bill at tax time and penalties -Short term losses can offset short term gains, long term losses can offset long term gains, but they can't offset each other -DO NOT FORGET TO ADJUST YOUR COST BASIS ON RSU SALES WHEN FILING TAXES
- fotta 3y ago> Be conscious of what is going on with sell to cover on RSUs if you go that route, especially shortly after you joined a company or vesting a new grant these will also be sold at short term gains (if the stock went up), also going towards you taxable income. This is an easy way to end up with a surprise monster tax bill. I don’t think this is true? My understanding, from my company which mandates sell to cover on vest, is that the cost basis is the price on the day of vest. The shares that are sold to cover are sold at the same price so there are no gains or losses and the amount that is sold is (in theory, if you’ve set it up this way) equal to your marginal tax rate so you end up paying around the correct amount to not have a huge tax bill. If you set your sell to cover % very low, then yes you will have a large tax bill because the vest value is treated as ordinary income and taxed at that rate. I do know some people at my company that intentionally set it to the lowest possible % and invest the difference while paying quarterly estimated tax payments, but it’s too much of a hassle for me personally.
- beau_g 3y agoPerhaps this only happened to me from the difference in market fluctuations in the day or two between vest and the sale (this happened to be in 2020 when my company was on a heater). Or maybe etrade allows you to sell shares from a different grant than the one vesting to cover and I didn't realize? In either case in 2020 it seemed like I got some rich guys W2 instead of mine and most of my sales were just sell to cover. I find it ultimately more simple to do the tax payment in cash rather than also involving a stock sale on top. Interesting you company mandates sell to cover, or do you just mean that is the default?
- jkhanlar 3y ago[flagged]
- eropple 3y agoThe newfound hype around DRS arises as a meme directly out of the Gamestop crankfest/fever-dream. It is harmless, but also meaningless; equities are not any more "yours" because of undertaking the timewaster of DRS and the concept is in current discourse as a shibboleth for membership in weird fin-cult silliness, which is exemplified really well in the parent poster's link to breathy, red-Arial-on-black "Central Bankers" fearmongering. Dan Olson covers it effectively in "This Is Financial Advice", which is a sober and well-researched drubbing of the meme-stock culture from which this nonsense comes. Worth watching in its entirety, both for entertainment value and for its thorough treatment of the subject. https://www.youtube.com/watch?v=5pYeoZaoWrA https://www.youtube.com/watch?v=5pYeoZaoWrA (If you want to see a real-life BSOD, get one of these people into a corner and ask them how equities are going to survive the "market collapse" they magically-think is right around the corner, regardless of method of registration.)
- TheDudeMan 3y agoWhich part did you not know?
- mkoryak 3y agoThe "what" part
- stouset 3y ago> Again, if you believe the stock is going to go up, and you want the stock, go ahead and keep these RSUs. I would caution against this and just say: sell your RSUs and ESPPs immediately upon vesting. There's an argument against doing so for ESPPs—especially ones that have appreciated—due to reducing your tax bill. But for most cases, the difference in your tax bill just isn't worth the additional exposure of your net worth to your company's volatility. I would further caution that it is far too easy to overweight what you think you know about your company when projecting its performance and severely underweight factors that you don't have any clue about. Your company's tech stack might be incredible and the product is a hit, but the sales team is nonexistent and your biggest competitor is two months away from eating your lunch. Or your product is complete shit but the CEO has been quietly negotiating a deal with Google on the side for 25% over market price. Or your company is executing at the top of its game and is completely unbeatable… until an unforeseeable market correction puts it out of business six months later. As much as you think you know, you have absolutely no idea what your company's stock price is going to do over the next month, quarter, or year. If you happen to be in a position where you actually know, you're going to be bound by significantly stricter insider trading policies than just your company's standard trading windows.
- 01100011 3y ago100% agree. Don't put all of your eggs in one basket. That said, by following this advice, I've now got $800k post-tax cash vs $4-5 million in stock, assuming I would have held on to my shares. Oh well.
- eloisant 3y ago"Don't put all of your eggs in one basket" doesn't mean "stay away from that specific basket". There is a middle ground between holding everything and selling as soon as it vests.
- stouset 3y agoYour income is already tied to your employer. For most people in most situations, attaching a significant fraction of your net worth to that same employer is an extremely risky position to be in. Of course you don't have to sell everything always all the time the moment you can. As always, use your own judgment. But your default tendency should be to divest and diversify.
- axxl 3y agoNearly everything in this article is too simple to be correct, or depends on details of your specific plan that is not generalizable. Two examples: ESPP is considered long term capital gains after the later date of 1 year after purchase OR 2 years from the date of the price you paid. Also typically the look back is the lower of the starting and ending price for a period, not lowest in the period. The only way to provide simple advice on RSUs and ESPP is, as others have said: Sell them immediately and diversify. For everything else do research and don't trust a random article, coworker, or HN comment (mine included)
- 4ad 3y ago> Sell them immediately and diversify. I can diversity even quicker with the extra cash I'd get instead RSUs and ESPPs.
- MapleWalnut 3y agoThat’s true, but with ESPPs, you get a discount on the stock price, effectively guaranteeing a decent return that would be hard to beat.
- gorjusborg 3y agoUnlike ESPPs (which you essentially buy with part of your paycheck) RSUs are pay with strings, so you usually don't have a choice between money and RSU. You can think of RSUs as 'golden handcuffs' compensation. The point is to reward you, while discouraging you from ever leaving because there will always be some that are not vested.
- 4ad 3y agoYou always have a choice between RSUs and cash. Negotiation is always on the table regardless of what anybody will tell you. Of course, it might be that you don't have enough negotiating power, but you can always choose another job. Personally I will never work at a place where I can't negotiate out of RSUs.
- 3y ago
- fatnoah 3y agoThis article misses the main "gotcha" for me with RSUs. A vesting event counts as a purchase for purposes of determining whether it was a "wash sale" (selling and then re-buying) or not. Not knowing this added insult to the injury of selling previously vested shares at a loss, since a big chunk of the potential loss deduction wasn't allowed.
- PopAlongKid 3y agoThe loss wasn't allowed in the current year, but it was added to basis of the remaining stock, so eventually the lower tax still happens.
- fatnoah 3y agoGood point, though the result of my clever maneuvering is having to deal with a loss carry forward for a long time due to the amount involved. I guess the bright side is that when I finally have some capital gains to report when I retire, I'll have something to offset them as the amount is large enough that the capital loss deduction allowed for ordinary income won't even be close to depleting it when I hit retirement age.
- ojbyrne 3y agoTL;DR always sell at vest. Take the tax hit, diversify. As long as you’re still working at the company you have plenty of eggs (unvested RSUs and future ESPPs) in that basket.
- nlawalker 3y agoThe simplest and most comprehensive advice I've seen about ESPP and RSUs is simply to not be influenced by the fact that the value is delivered to you as shares. It's 2024, it's all fungible, selling shares requires a couple clicks and zero fees. Imagine that the value of your ESPP and RSUs was all delivered to you as cash - would you take that cash and invest in your company's stock? If yes, then sure, keep the shares; if not, then make the couple of clicks to sell it and do something else with it. What I wish I knew about sooner was the mega backdoor Roth. https://www.bogleheads.org/wiki/Mega-backdoor_Roth https://www.bogleheads.org/wiki/Mega-backdoor_Roth EDIT: Also interesting, I just heard the other day about https://heybenny.com/ https://heybenny.com/ - effectively payday loans so you can max out your ESPP if you would otherwise have trouble doing so due to cashflow.
- stouset 3y ago> What I wish I knew about sooner was the mega backdoor Roth. Absolutely. If your plan supports this, it’s a no-brainer way to put away an aggregate of $76,000 in tax-advantaged savings between a Roth, 401(k), and Roth 401(k). Depending on employer matching, you’re putting around $50,000 of that into post-tax buckets, so it will never see taxes again. That said, it is bonkers to me that we have a system where most Americans’ only retirement savings option is $7,000 into some form of IRA. Anything availability of a 401(k) or mega-backdoor is completely up to your employer’s benefits package. It doesn’t matter how much you make, the availability of these tax-advantaged retirement options is entirely gated on your choice of employer. In a just world we would eliminate the pointless and easily bypassed MAGI limits for IRAs and establish a shared tax-advantaged savings limit regardless of account type.
- PopAlongKid 3y ago>most Americans’ only retirement savings option Not true. Anyone can buy stocks and bonds, and for most part defer paying taxes on unrealized gains for decades. And when they do need to realize gains (i.e. sell), the tax rate will be the lower LTCG rate. And anything left over at death passes to heirs free of income tax (basis adjustment to FMV). >a no-brainer way to put away an aggregate of $76,000 in tax-advantaged You keep on using the term "tax advantaged" without defining what that means. For Trad. IRA/401k compared to Roth, it is a simple matter of your future tax rate compared to today. If those two rates are the same, there is no difference[0]; if future tax rate is higher, go Roth, if future tax rate is lower, go Trad IRA/401k > pointless and easily bypassed MAGI limits for IRA Please explain "easily bypassed". If you meant the "backdoor" aspect, that is only easily by-passed if one does not have any pre-tax money in Trad. IRA. And if you mean Roth 401k, those are even much less common than the ordinary 401k. >In a just world we would eliminate .... Just as we would allow health insurance to be paid with pre-tax money, whether employed or not. [0] for simplicity-- using round numbers and assume 5% simple annual investment return (no compounding), and 20% tax rate Pre-tax contribution: $10K + (20yrs x 0.05 x $10K) = $20K withdrawal at 20% tax = $16K net Post-tax (Roth) contribution: ($10K - $2K tax) + (20yrs x 0.05 x $8K) = $16K withdrawal at 0% tax = $16K net