Avoid RSU Tax Pitfalls: What You Need to Know About Minimizing Double Taxation and Underwithholding

When you receive Restricted Stock Units (RSUs), it's important to understand the tax implications, especially regarding sourcing, cost basis, and underwithholding. Here are the key points to remember:

1. Sourcing RSUs:
   The source of RSU income is based on the workdays you worked during the grant-to-vest period. This means your tax reporting should reflect the actual time you worked in each location, not just the payroll periods, which can sometimes lead to discrepancies.

2. Discrepancies with Payroll Reporting:
   If your payroll switch occurred before or after a move, the RSU income might not be reported accurately. This misalignment can happen if, for example, the company’s payroll system was updated before or after your relocation, causing a mismatch between your actual workdays and what is reported for tax purposes.

3. Correcting Reporting Issues:
   To avoid double taxation and accurately report to the right tax jurisdiction, the method of correcting the reporting will depend on your particular situation and the taxing jurisdictions involved.  Typically, discrepancies can be correcting by either:

• On your tax return: If the payroll reporting doesn’t match your actual RSU source or vesting, you may need to adjust it on your tax return.

• Through payroll: If feasible, you can work with your payroll department to get a corrected wage statement (ex: Form W-2c).

4. Adjusting RSU Basis:
   The basis of your RSUs (the amount taxed) may need to be adjusted based on how your company and brokerage firm reported the income. Be sure to verify the amount that was already taxed as ordinary income on your W-2. This will impact your capital gains tax when you sell the RSUs.

5. Underwithholding and Supplemental Income:
   Underwithholding on RSUs is common because the default statutory withholding rate for supplemental income (which includes RSUs) is typically 22% at the federal level. However, depending on your overall income and therefore, your marginal tax rate, this rate may be insufficient. For higher-income earners, the statutory withholding rate could be lower than their actual tax liability, leading to underwithholding. In such cases, you may owe additional taxes when you file your return. It's important to review your withholding and, if necessary, adjust it to prevent unexpected tax bills or penalties at year-end.

In conclusion, the tax treatment of RSUs can be complex, especially when workdays, payroll switches, and company or brokerage reporting vary. Ensuring accuracy can prevent costly mistakes like double taxation and help you manage your RSU-related tax obligations effectively. Additionally, being mindful of underwithholding can save you from surprises, like the underpayment penalty, when it's time to file your taxes.

For Expats: Important Reminder About 2-Month Extension

Many expats may already be aware of the automatic 2-month extension to file their returns and pay federal income tax if they are a U.S. citizen or resident alien, and on the regular due date of your return they are living outside of the United States and Puerto Rico and their main place of business or post of duty is outside the United States. While this extension provides some flexibility while delaying late filing and late payment penalties, it’s essential to remember that this delay does not come without its nuances, especially when it comes to the interest on any outstanding tax balances.

Interest Still Accrues from the Original Filing Deadline

Although you have more time to file your tax return, interest on any taxes due will begin to accrue starting from the original April 15th filing deadline. The IRS charges interest on any unpaid taxes after the initial deadline, and this interest compounds daily.

So, even though you may now have until June 15th to submit your tax documents, if you owe money, it’s important to remember that interest will start accumulating as if you didn’t receive an extension. This can add up quickly, especially if your taxes owed are substantial.

How to Avoid Unnecessary Costs

To avoid interest from piling up and potential late payment penalties, here are a few tips:

1. Pay What You Can: Even if you can’t file your tax return by the original deadline, consider making a payment toward any balance due. By paying some or all of your tax balance, you’ll reduce the interest and penalties that will accrue.

2. File for an Additional Extension if Necessary: If you need even more time beyond the automatic 2-month extension, you can file IRS Form 4868 to request a further extension. However, this is an extension to file, not to pay, so you’ll still need to estimate and pay your taxes owed to avoid penalties.

3. Review Your Situation Regularly: Stay on top of your tax obligations and any correspondence from the IRS. Regularly check your online IRS account or contact a tax professional to ensure you're up to date on your tax filing status and payment obligations.