Individuals apply for the Research and Special Projects Program (RSP) through the Internal Revenue Service (IRS). The RSP provides a tax credit for qualified research and experimental activities. The credit is claimed on a business’s tax return, and the amount of the credit is calculated based on the qualified expenses incurred during the tax year. The credit is a dollar-for-dollar reduction in the amount of taxes owed, and it can be used to offset both income and self-employment taxes. However, the credit is not refundable, meaning that any unused portion of the credit cannot be carried forward to subsequent tax years.
RSUs and the Ordinary Income Tax
When you receive RSUs (Restricted Stock Units), you are essentially being granted a future right to receive shares of stock in the company. These shares are not actually yours until they vest, which typically happens over a period of time. However, the IRS considers RSUs to be taxable income when they vest, even if you don’t sell them right away.
This means that you will have to pay ordinary income tax on the value of the RSUs when they vest. This tax is calculated based on your ordinary income tax rate for the year in which the RSUs vest.
For example, let’s say you have RSUs that vest in 2023 and are worth $10,000. If your ordinary income tax rate for 2023 is 25%, you will have to pay $2,500 in taxes on the RSUs.
In addition, you will also have to pay capital gains tax if you sell the shares of stock that you receive from the RSUs. Capital gains tax is calculated based on the difference between the price you paid for the shares and the price you sell them for.
The following table summarizes the tax treatment of RSUs:
| Event | Tax Treatment |
|---|---|
| RSUs vest | Taxed as ordinary income |
| RSUs sold | Capital gains tax due |
The Nature of RSUs
Restricted stock units (RSUs) represent a form of equity compensation that grants employees a specific number of company shares after a vesting period. These shares are acquired by the employee at fair market value on the date they are vested.
Initial Taxation Event
The initial taxation event for RSUs occurs upon vesting, when the employee’s rights to the underlying shares become non-forfeitable. At this point, the employee is subject to ordinary income tax on the fair market value of the vested shares.
Second Taxation Event
The second taxation event related to RSUs occurs when the employee ultimately sells the shares, either on the open market or through a company buyback program. This sale triggers capital gains tax, which is calculated as the difference between the sale proceeds and the cost basis of the shares (typically the fair market value at the time of vesting).
The Impact of the Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) can complicate the tax treatment of RSUs, particularly for high-income individuals. The AMT is a parallel tax system that calculates an alternative minimum taxable income amount and imposes a 26% or 28% tax rate on that amount.
For individuals subject to the AMT, RSUs can be taxed twice under certain circumstances:
- Upon Vesting: Ordinary income tax is due on the fair market value of vested shares.
- Upon Sale: Capital gains tax is due on the sale proceeds, regardless of the holding period of the shares.
- Under AMT: If the combined amount of regular income and capital gains tax is less than the AMT liability, the employee may also be subject to an additional tax on the value of the shares at vesting.
In summary, RSUs can be taxed twice due to the separate taxation of vesting income and capital gains. The AMT can further complicate this tax treatment, potentially resulting in a third layer of taxation for high-income individuals.
Net Unrealized Appreciation (NUA) at Sale or Exercise
When RSUs are sold or exercised, the employee is taxed on the difference between the sale price or exercise price and the cost basis of the RSUs. This is known as capital gains tax. In addition, the employee is also taxed on the net unrealized appreciation (NUA) of the RSUs. NUA is the difference between the fair market value of the RSUs at the time of sale or exercise and the cost basis of the RSUs.
The NUA is taxed at ordinary income tax rates, which are typically higher than capital gains tax rates. This means that RSUs can be taxed twice, once at the time of sale or exercise and again when the NUA is realized.
The following table summarizes the taxation of RSUs:
| Event | Taxation |
|---|---|
| Sale or exercise | Capital gains tax on the difference between the sale price or exercise price and the cost basis of the RSUs |
| Realization of NUA | Ordinary income tax on the difference between the fair market value of the RSUs at the time of sale or exercise and the cost basis of the RSUs |
State and Local Tax Implications of RSUs
Restricted stock units (RSUs) are a type of equity compensation that is taxed differently than traditional stock options. RSUs are taxed twice: once when they are vested and again when they are sold. This can result in a significant tax burden for employees who receive RSUs as part of their compensation package.
State Income Tax
The tax treatment of RSUs at the state level varies depending on the state in which the employee resides. Some states, such as California and New York, tax RSUs as ordinary income when they are vested. Other states, such as Texas and Florida, do not tax RSUs until they are sold.
Local Income Tax
In addition to state income tax, RSUs may also be subject to local income tax. The tax treatment of RSUs at the local level varies depending on the municipality in which the employee resides. Some municipalities, such as New York City and San Francisco, tax RSUs as ordinary income when they are vested. Other municipalities, such as Chicago and Los Angeles, do not tax RSUs until they are sold.
Impact of Double Taxation
The double taxation of RSUs can have a significant impact on the after-tax proceeds that employees receive from their RSUs. For example, an employee who lives in California and receives $100,000 worth of RSUs will owe approximately $15,000 in state income tax when the RSUs are vested. If the employee sells the RSUs for $120,000, they will owe an additional $18,000 in state income tax. This means that the employee will only receive $87,000 after taxes from the sale of the RSUs.
Strategies to Mitigate Double Taxation
There are a number of strategies that employees can use to mitigate the double taxation of RSUs. One strategy is to exercise the RSUs and sell them in a year when the employee’s income is lower. This will reduce the amount of income tax that the employee owes on the sale of the RSUs. Another strategy is to hold the RSUs until after retirement. This will allow the employee to take advantage of the lower capital gains tax rates that apply to long-term capital gains.
| State | Tax Treatment of RSUs |
|---|---|
| California | Taxed as ordinary income when vested |
| New York | Taxed as ordinary income when vested |
| Texas | Not taxed until sold |
| Florida | Not taxed until sold |
Well, there you have it, folks! We hope this little piece has helped shed some light on the puzzling question of why your tax refund might be a little smaller than you expected. Remember, if you have any questions or concerns about your taxes, don’t hesitate to reach out to a tax professional for guidance. Thanks for sticking with us, and be sure to pop back in again soon for more financial insights. Take care, and keep those tax returns organized!