How do RSUs impact taxes?

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 Restricted Stock Units (RSUs) can have tax implications for the recipient, and how they are taxed depends on various factors, including when the RSUs vest and whether the employee chooses to sell the shares immediately or hold onto them. Here's a general overview of the tax implications of RSUs:


Vesting:


RSUs are typically taxed when they vest. At vesting, the market value of the vested shares is considered ordinary income to the employee.

Taxation as Ordinary Income:


The value of the vested RSUs is treated as ordinary income, and taxes are withheld by the employer. This amount is added to the employee's W-2 income.

Withholding Taxes:


Employers often withhold a portion of the vested RSUs for federal and state income taxes. The withholding amount is determined by the company's policies and the applicable tax rates.

Choice of Withholding Method:


Some employees may have the option to choose between having a percentage of the RSUs withheld for taxes or paying the taxes with cash from other sources.

Sale of RSU Shares:


When the employee decides to sell the RSU shares, any additional gains or losses are treated as capital gains or losses.

If the shares are sold immediately upon vesting, the gain or loss is typically minimal, and it is still considered a short-term capital gain or loss.

Long-Term vs. Short-Term Capital Gains:


If the employee holds onto the RSU shares for a certain period (usually more than one year), any subsequent gains or losses from the sale are treated as long-term capital gains or losses. Long-term capital gains are generally taxed at lower rates than short-term gains.

Tax Planning:


Employees with RSUs may want to engage in tax planning, such as selling shares strategically to minimize tax liabilities or taking advantage of any available tax credits or deductions.

State and Local Taxes:


The taxation of RSUs can vary at the state and local levels, so employees should be aware of the tax rules in their specific location.

Alternative Minimum Tax (AMT):


In some cases, employees may be subject to the Alternative Minimum Tax (AMT) when RSUs vest. This can affect the calculation of taxes owed.

It's crucial for individuals receiving RSUs to understand the tax implications and consider consulting with a tax professional or financial advisor. Tax laws are complex and subject to change, and individual circumstances can vary, so personalized advice is often beneficial.

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