If you have restricted stock units, you will want to save as much money on taxes as you can. RSUs are taxed as ordinary income when they are vested and withhold taxes that are due at the time of vesting. After being vested, there are capital gains taxed applied depending on the holding period of the RSUs, your taxable income, and filing status. Keep reading for tax saving strategies for RSUs.
It is important to know how RSUs work and how they are taxed before learning tax saving strategies. Restricted stock units are treated the same as a cash bonus when it comes to taxes. Companies typically use the flat IRS withholding rate for supplemental income for your RSU income. You could potentially owe additional taxes when you file.
Since standard deductions are now $12,550 for single filers and $25,100 for joint filers, now is a great time to start deduction bunching for itemized returns. Deduction bunching is utilizing as many deductions as possible into one tax year to minimize your taxes. Since RSUs are taxed as income the year they are vested, you should consider deduction bunching to offset the additional income. The most common deductions include mortgage interest, charity donations, medical expenses, and SALT deductions.
Maximizing tax-deferred contributions
Making contributions to employer sponsored 401(k)s or IRAs comes along with a tax benefit by reducing your taxable income. If you have RSUs, you can use the proceeds from the sale to max out your tax-deferred contributions to offset your tax bill. For 2021, the maximum employer 401(k) contribution is $19,500 with a catch up contribution of $6,500 for people ages 50 and older. The maximum IRA contribution is $6,000 for 2021 with a $1,000 catch-up contribution. By selling your RSUs and using the gain on the sale to max out your contributions, you can receive more tax deductions to lower your tax liability.
Donor Advised Funds
Charitable donations are a great way to give back while also receiving a tax deduction. If you want to go ahead and put money aside to be given to charity but dispersed over several years, donor advised funds could be a great option for you. To start a donor advised fund, you open a charitable fund in your name, make the contributions which are tax deductible the year they are received, have assets invested in the fund to grow tax free, and make grants to charities at any point in the future. You can also avoid capital gains tax on donated securities.
These three tax saving strategies for RSUs can be utilized to maximize your tax deductions, and in some cases lower your capital gains taxes owed. Your strategy for RSUs is critical to your financial success and well being. If you are having trouble deciding what RSU strategy is right for you, Eagle Grove Advisors is here to help. Give us a call today to get started on your tax savings strategies with RSUs.