Channing Wysopal 3/14/25 Channing Wysopal 3/14/25

Don't Pay Taxes on Your RSUs Twice: A Common Tax Season Pitfall

As we find ourselves in the midst of another tax season, let's address a common mistake I come across year after year: double taxation on Restricted Stock Units (RSUs). If you're one of the many professionals who receive RSUs as part of your compensation package, you might be unknowingly paying taxes twice on the same income when you sell those shares.

It's remarkably easy to make this mistake. Your RSU income typically appears on your W-2, but it often doesn't have a separate line item telling you exactly how much of that W-2 income came from RSUs. When you later sell those shares, the connection between your previously taxed income and the stock sale isn't automatically made, leading to potential double taxation.

To avoid this costly error, it's crucial to gather the following information before preparing your taxes:

Which specific shares you sold from which grant
Which shares vested from which grant
The exact vesting date of each share
The sale date of each share
The fair market value of the shares on the vesting date
Your Stock Plan accounts supplemental forms

Armed with this information, you can properly account for your RSU sales and avoid paying taxes twice on the same income. This costly error affects countless taxpayers each year, but with proper understanding, you can avoid it and potentially recover taxes you've overpaid in previous years.

RSUs are taxed at two distinct points in your investment journey. First, when your RSUs vest, the shares' market value becomes taxable as ordinary income. This income appears on your pay stub and is reported on your W-2. Your employer typically withholds taxes by selling a portion of shares to cover the tax obligation. Later, when you sell the shares, you're taxed only on the difference between the sale price and your cost basis (the value of the shares at vesting). This is where things often go wrong. The issue stems from the fact that RSUs are considered "non-covered securities" by custodians, meaning they aren't required to report the cost basis on Form 1099-B. This key detail is often overlooked by both tax preparers and individuals filing their own returns.

Case Study

Michael works at a tech company and received 500 RSUs that vested when the company's stock price was $200 per share, resulting in $100,000 of ordinary income. This $100,000 was properly reported on his W-2 and taxed as regular income. A few months later, Michael sold all 500 shares for $240 per share, receiving $120,000.

Michael's true capital gain is only $20,000 ($120,000 sale proceeds minus his $100,000 cost basis). He should pay capital gains tax only on this $20,000.

However, Michael's 1099-B from his brokerage showed his sale proceeds of $120,000 but listed his cost basis as $0 in Box 1e. If his tax preparer transfers this information directly to his tax return without making any adjustments, the entire $120,000 would be treated as a capital gain, even though $100,000 had already been taxed as ordinary income on his W-2.

Let's calculate the financial impact:

If Michael is in the 37% marginal tax bracket and the sale was a short-term capital gain (also taxed at 37%), the double taxation would cost him an additional $37,000 ($100,000 × 37%) in unnecessary taxes. That's tens of thousands of dollars that should rightfully stay in Michael's pocket.

Here’s what should have happened on Michael’s tax return:

If Box 1e on Form 1099-B has no cost basis (as is common with RSUs):

Report the $120,000 in proceeds as shown on his 1099-B on Form 8949
List the correct cost basis ($100,000) directly in column (e) on Form 8949
Check Box B (or E for long-term gains) at the top of Form 8949
No adjustment or code is needed in columns (f) or (g)

This would ensure Michael only pays capital gains tax on the actual gain of $20,000, avoiding double taxation on the $100,000 that was already reported as income on his W-2.

How to Check Your Situation

To check if you've made this mistake in previous years, review your past three years of tax returns, specifically Form 8949 (Sales and Other Dispositions of Capital Assets). Compare the cost basis shown on your tax return with the information from your broker's supplemental information. If the numbers don't match, you likely have an error on your return that caused you to pay more tax than necessary. If you discover you've paid double tax in previous years, you can amend returns that are within the three-year statute of limitations by filing Form 1040-X, Amended U.S. Individual Income Tax Return.Consider attaching documentation that shows the correct cost basis to make it easier for the IRS to process your amendment. Be aware that the IRS may take 6-12 months to process amended returns.

Understanding the taxation of RSUs is crucial to avoiding double taxation. When you sell RSUs, remember that your cost basis is the value of the shares when they vested, which has already been taxed as ordinary income. Don't rely solely on the 1099-B form from your broker. Instead, look for supplemental information that shows the correct cost basis, and make the proper adjustments on your tax return.

If you believe you may have fallen victim to this error in past tax returns, there's still hope. You can file an amended return (Form 1040-X) with a corrected Form 8949 following the steps outlined in this article. The IRS allows you to amend returns filed within the last three years, potentially recovering thousands in overpaid taxes. For someone in Michael's situation in the 37% tax bracket, that could mean recovering $37,000 for just one year's mistake and potentially more if the error occurred across multiple years.

The Bottom Line: Get Professional Guidance

If you feel like you could benefit from a second set of eyes on your tax situation, especially if you have RSUs or other equity compensation, feel free to reach out to me. I’ve helped many professionals simplify their equity and tax situations.

Need a second set of eyes on your tax situation? Book an Intro to get started.

This article is for informational purposes only and does not constitute tax advice. Please consult with a qualified tax professional for advice specific to your situation.

Channing Wysopal 2/3/25 Channing Wysopal 2/3/25

The 5 Biggest Mistakes People Make with RSUs (and How to Fix Them)

Restricted Stock Units (RSUs) can be a fantastic wealth-building tool, but they also come with pitfalls that can trip up even the most financially savvy. If you have RSUs as part of your compensation, avoiding these five common mistakes can save you from tax surprises, financial instability, and concentration risk. Here’s what to watch out for — and how to fix them.

1. Not Knowing Your Vesting Schedule

Many people assume their RSUs will just “show up” when they vest, but failing to track your vesting schedule can lead to missed planning opportunities.

Fix It: Grab your grant documents and build out a simple spreadsheet with your vesting dates. Even better, set a reminder on your phone for each vesting date. Why? Because when your shares vest, you may need to take action—whether that’s selling some for taxes, rebalancing your portfolio, or making sure your overall strategy stays on track.

2. Misunderstanding Taxation

RSUs are taxed as supplemental income when they vest. For most employees, companies withhold 22% for federal taxes. But if your income is high enough to push you into a 32% or 37% tax bracket, you’re likely under-withholding—and that could mean a surprise tax bill or worse penalties come April.

Fix It: Run a projection to see if your RSU withholdings match your actual tax bracket. If you’re under-withheld, you may need to make estimated tax payments, adjust your withholding on your RSUs, or adjust your W-4.

3. Lack of Diversification

When RSUs vest, you might be tempted to hold onto them, especially if your company is performing well. But keeping too much of your wealth in one stock creates concentration risk—meaning a downturn in your company’s stock could significantly impact your financial well-being.

Fix It: Have a strategy for selling your RSUs. Decide in advance what percentage you’ll sell upon vesting and reinvest into a diversified portfolio. Remember, putting all your eggs in one basket isn’t a great idea when it comes to investing.

4. Not Considering Unvested RSUs if You Change Jobs

Unvested RSUs don’t travel with you if you leave your company. This means that if you’re considering a job switch, you might be walking away from a significant portion of your compensation.

Fix It: Before making any career moves, check how many RSUs are unvested and when they’re set to vest. If a large vesting date is coming up, it might make sense to stay a little longer. Also, negotiate your new compensation package with RSU loss in mind—some companies may offer a signing bonus or equity grants to make up for it.

5. Relying On RSUs to Cover Fixed Expenses

Since RSU vesting depends on your employment and company stock performance, relying on them for fixed expenses (like mortgage payments or rent) can be risky. If your company’s stock declines, your compensation could take a hit—making it harder to meet those financial obligations.

Fix It: Treat RSUs as a bonus, not a guaranteed paycheck. If you want to incorporate them into your cash flow, use them for flexible expenses or investments rather than relying on them to cover essential bills. This way, you won’t be caught off guard if your stock takes a dip.

Final Thoughts

RSUs can be a great thing for wealth building—if managed correctly. By understanding your vesting schedule, planning for taxes, diversifying, evaluating unvested shares before job changes, and not relying on RSUs for fixed expenses, you’ll be in a much stronger financial position.

Need help navigating your RSU strategy? Book an Intro and let’s chat about how to integrate them into your broader financial plan.