Households with equity compensation produce the most common large April surprise we see, and it comes from a mechanism that is easy to explain and easy to miss.
RSUs: income at vest
Restricted stock units are compensation. When they vest, the market value on that date is ordinary income and it appears on your W-2 — whether or not you sold anything.
The problem is withholding. Employers commonly withhold at a flat supplemental rate that is below the marginal rate of many households receiving significant equity. The shortfall does not show up anywhere until the return is prepared.
The fix is to check during the year and adjust W-4 withholding or make an estimated payment, rather than discovering it in April.
After vesting, it is just stock
Your basis is the amount already taxed at vest. Sell immediately and there is little or no further gain. Hold, and any subsequent movement is capital gain or loss with its own holding period starting at vest.
A very common error is reporting the sale without adjusting basis, which taxes the same income twice. Broker statements frequently show a basis of zero or an unadjusted figure, and it has to be corrected on the return.
Options, briefly
- Non-qualified options (NSOs) — the spread at exercise is ordinary compensation income, withheld on and reported on the W-2. Subsequent movement is capital gain.
- Incentive stock options (ISOs) — no ordinary income at exercise for regular tax, but the spread is an adjustment for alternative minimum tax, which is where people get caught. Meeting the holding requirements produces favourable treatment on sale; failing them produces a disqualifying disposition taxed as ordinary income.
The AMT exposure on a large ISO exercise is the single most consequential planning item in this area, and it is a decision made before exercising rather than after.
ESPP
The discount is generally ordinary income at some point, and the timing and character depend on how long the shares are held after purchase and after the offering date. It is not complicated but it is specific, and the plan documents matter.
Concentration
Beyond tax: a household with a large position in the employer's stock has its income and its savings exposed to the same single risk. That is an investment question rather than a tax one, but it is worth saying out loud because the tax planning frequently drives the timing of doing something about it.
This article is general information, not tax advice, and tax rules change from year to year. Confirm current-year figures and talk with a professional about your specific situation before acting.
Common questions
Why do I owe so much when my RSUs already had tax withheld?
Because employers commonly withhold at a flat supplemental rate that is below the marginal rate of many households receiving significant equity. The shortfall accumulates through the year and appears at filing. Checking mid-year and adjusting withholding prevents it.
What is the ISO AMT trap?
Exercising incentive stock options creates no ordinary income for regular tax, but the spread is an adjustment for alternative minimum tax. A large exercise can produce a substantial AMT liability in a year with no cash from a sale to pay it, which is why the decision belongs before exercising.
Why does my broker show a zero basis on RSU shares?
Because the basis was established by the amount already taxed at vest, and broker reporting frequently does not reflect that adjustment. Reporting the sale without correcting it taxes the same income twice.
Have a question about your situation?
Robert prepares returns for individuals, contractors, and small business owners across Weatherford, Aledo, Willow Park, Springtown, Mineral Wells, and the rest of Parker County. Bring your questions — the first conversation is free.