The common issue with RSUs

Josh Bennett, managing partner at Vincere Wealth Management, has extensive experience guiding tech professionals through complex tax challenges, particularly in areas like equity compensation and stock options. He says that when it comes to RSUs (Restricted Stock Units), there’s one overriding common issue: under-withholding.

“A big problem we saw, especially during the COVID stock market boom, was that RSUs typically withhold taxes at 22%, but many tech professionals fall into a much higher tax bracket," he explains. "People were blindsided during tax season with $30,000 tax bills, asking, 'Why am I getting this bill? I didn’t sell anything.' It’s because their RSUs didn’t withhold enough to cover the gains on the stock price."

Here, Bennett advises these clients to review their withholdings quarterly to avoid unpleasant surprises.

"Penalties are higher now due to rising interest rates, so it’s critical to stay on top of withholding or make estimated payments," he adds. Importantly, he notes that paying taxes late, even within the same tax year, can still incur penalties: "The IRS factors in not only how much you paid, but when you paid it."

Another significant challenge with tech compensation is the Alternative Minimum Tax (AMT), especially with Incentive Stock Options (ISOs).

"When you exercise ISOs, the difference between your strike price and the market price becomes taxable for AMT, even if you haven’t sold the stock," Bennett says. "We’ve seen clients with massive AMT bills—$200,000 to $300,000—without even realizing how they triggered them. People have conviction in their company’s future, but we have to ask if it’s the right time to exercise. It’s not just about tax efficiency; we also weigh market volatility and the likelihood of liquidity events."

When discussing the differences between advising business owners and individual clients, Bennett highlights the significant tax opportunities available to business owners.

“Most of the tax code benefits real estate owners and business owners. Depreciation and amortization are huge opportunities," he explains. For example, business owners can purchase assets or companies and deduct depreciation or amortization over time, providing substantial tax savings. Here, Bennett encourages young entrepreneurs to consider acquiring businesses from retirees.

“There’s a massive wealth shift happening, and instead of starting from scratch, you can buy a business, leverage it, and still take advantage of tax benefits like depreciation."

On staying ahead of the curve with tax changes, Bennett admits it’s challenging.

“We use multiple sources, from the IRS website and newsletters to professional subscriptions like CCH and Bloomberg. They help us interpret new rulings or legislative changes," he says. One recent example involved the back-and-forth in Congress over extending 100% bonus depreciation.

"We had clients buying assets based on the potential for bonus depreciation, but with elections coming up, it’s looking like this will stall. It was a potential change with big impacts that we had to monitor closely."

Balancing tax planning with long-term financial goals is another critical aspect of Bennett’s work. He often warns clients not to let the "tax tail wag the dog." For example, some business owners try to maximize deductions, but Bennett cautions that this can reduce the credibility of their financials when selling the business.

“Buyers don’t want to see jerry-rigged financials. It’s better to show profitability, even if it means taking a bigger tax hit initially,” he advises.

Similarly, Bennett counsels clients with concentrated stock positions to consider selling rather than holding solely to avoid taxes.

“Some people risk losing 50% of their portfolio to avoid paying 15% capital gains tax. It’s important to look at the big picture, not just short-term tax avoidance. Many retirees hold high-dividend stocks in brokerage accounts, which can push their Social Security into the taxable range. By shifting dividend-producing assets into IRAs and holding municipal bonds in brokerage accounts, we can significantly lower their taxable income and preserve Social Security benefits.”