First of all, if you’ve got a double-trigger RSU on your plate. Congratulations! You’re about to come into a lot of money. ????
(And also, good on you for reading this article & being smart enough to figure out what to do with your finances when this happens, because there will be tax implications… and being prepared is always better.)
But before we get into planning WHAT to do, let’s take a step back so you can understand exactly what’s going on with your RSU double-trigger agreement, and how that affects your finances, wealth planning, and your taxes.
Double-Trigger RSU: A Definition
Basically, if you have RSU with a company, it usually means they vest over time as you continue to work there.
But, under a double-trigger, you don’t actually receive the shares until two separate conditions (the double trigger) are satisfied. And normally, those two conditions are:
1) Time (as in time worked for the company)
2) Performance (a change in control, like an acquisition, or an IPO.)
Taxes on Normal RSU Vesting
If your RSUs vest normally, taxes are pretty straightforward and simple. Each time your shares vest, their value is taxed as ordinary income. So if you’ve got 500 shares that vest at $50 each, that’s $25,000 of additional income that’s taxed at the rate of your top tax bracket.
Then, each new time more RSUs vest, they’re considered “income” in that timeframe and taxed accordingly.
Taxes on Double-Trigger RSU Vesting
When double-trigger vesting comes into play, taxes get a little more complicated… because you have A LOT of wealth accumulating all at once. (So instead of being taxed in increments like with regular vesting, you can have years & years worth of RSUs to pay taxes on in just one year.)
The thing is, with double-trigger RSUs, you don’t get taxed on your accumulated options every year… you actually don’t get taxed on them at all until the performance trigger (the IPO) happens.
So once your Double-Trigger RSUs vest, you will have a lot more wealth, but you’ll also have to pay a lot more in taxes. Like a lot more in taxes. ????
Sometimes, you may even owe up to 50% in taxes on the total of your RSU, because they all vest at once, and it pushes you into a much higher tax bracket. (And the RSUs get taxed at the rate of your highest bracket.)
Timing of Taxes with RSU + IPO
However, it’s also important to note that the vesting may not happen the instant the IPO or the company sale happens.
For example, I looked at a client’s RSU agreement when their company was about to IPO, and realized that their shares wouldn’t be issued until six months after the IPO… which means their RSUs became taxable right around the time that the lock out expired.
This could be good news, though, because while you may not be able to cash out your RSUs for six months, it gives you time to plan for the massive increase in taxes you’ll likely owe… and find smart ways to bring that payment down.
5 Ways to Plan for a Double-Trigger RSU Tax Increase
So let’s say your RSUs have already been double-triggered, and you’re still in the window of waiting for them to become taxable. What can you do?
Or if you think your company is going to IPO soon, and your other trigger has been met… you’ll want to make sure you have all your ducks in a row so your tax bill doesn’t completely wipe you out.
The first important thing to acknowledge is there’s nothing you can do about being taxed at this sudden spike in income. It’s not like with other stock options where you only get taxed when you exercise them… these babies are getting taxed whether you like it or not.
It’s important to plan, because more than likely, your tax rate will go up, and your company won’t withhold enough. Statutory withholding on RSU is 22% for federal taxes, and 10% for state.
So if you end up in the 37% federal tax bracket thanks to your rush of RSU income, that’s a 15% gap between what your company withheld for you and what you still owe. (Not to mention what you might also owe to the state.)
In the end, this means a huge, unexpected tax bill that knocks a lot of people over on their bums. Fortunately, with some smart planning, you can reduce that bill and have an easier time making your tax payments this year.
1. Lower Your Withholding Allowances to Lower Amount Owed
If you’re still getting paychecks from your company, you can lower your withholding allowances to tell your company to withhold more from your paycheck to go to your tax payments.
To do this, log into your payroll provider, and change your settings to:
This will mean more money is withheld from each paycheck, so you’ll owe less when it’s time to file your tax return.
(You can also choose to withhold additional amounts, though I generally suggest against this unless you’ve put together a tax plan with an advisor.)
2. Max Out Your Pre-Tax 401(k) to Save As Much as Possible in Your New Tax Bracket
By maxing out your pre-tax 401(k), you can get a deduction of up to $19,000, which will reduce the amount you owe on your taxes. The value of this deduction varies depending on your tax rate… but if your tax rate is going up because so many of your RSUs are vesting at once, this could be a great way to save money.
So, for example, if you’re in the 24% federal tax bracket, you’ll save $4,560 in taxes.
But if you’re in the 37% bracket, that savings amount goes up to $7,030.
3. Delay Other Sources of Income
To be fair, some people have more control in this area than others. You won’t be able to do much about delaying your salary, bonuses, or RSU values. But you CAN usually do something about things like:
Selling long-term capital gain shares from the prior exercise of stock options & getting taxed on that income at a higher rate because all your RSUs vested.
Exercising non-qualified stock options and getting taxed at the highest possible ordinary income rate.
HOWEVER -and I put that in all caps because it’s important-, you need to consider other parts of your life before employing this step.
Make sure you look at other aspects of your financial life, and if something like the benefit of selling your shares now outweighs the benefit of waiting just for the sake of paying less taxes, do what you need to do.
Working with an advisor is a great way to figure out the best steps for you here.
4. Increase Charitable Giving
This follows the same reasoning as maxing out your pre-tax 401(k)… the tax deduction you get for charitable giving becomes more valuable when your tax bracket is higher.
But also, having a higher standard deduction also means that there’s a certain amount you have to give before you start receiving a tax deduction, so make sure you check your tax plan to know what this is.
In this kind of scenario, one of my favorite things to suggest is a donor-advised fund, where you can donate your appreciated shares that’ve been held for at least a year.
This way, you get the same tax deduction you’d get if you gave cash out of your personal checking account, and you get to avoid paying capital gains on the shares that were donated. It’s a great win-win situation, because you get a lower tax bill now, and you avoid some taxes you’d have to pay in the future.
5. Exercise & Hold Your ISOs
Since your double-trigger RSU will increase your ordinary income, this means that (sometimes) you can exercise more ISO options without having to pay Alternative Minimum Tax.
This won’t necessarily bring your tax bill down, but it’s a pretty great benefit, because it means that since an IPO has happened, you’ll definitely be able to sell the shares from the ISO later on.
Smart, Intelligent Ways to Bring Down Your Tax Bill
Double-Trigger RSUs are an incredible boon to your income, but they definitely have tax consequences too. The good thing is, if you’re on top of your planning and know how to use your money in smart ways, you can bring that tax bill down to have less of a large chunk taken out of your bank account come tax time.
Get in touch today to schedule a consult for ways we can help you save thousands on your tax bill after your double-trigger RSU happens.