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Cash reserve and Tax reserve for GSUs
Speaking of savings goals! While investing is best for growing your wealth over the long term, the short term still matters. Holding a cash reserve can give you a cushion to fund short term goals & an emergency fund. This is especially important if you are living off of some GSUs. The last place you want to be is waiting on that good old GSU vest and trading window to happen because the kids’ annual tuition is due.
Having a safety net set aside for a rainy day can help you feel more secure and less worried. We recommend you hold at least 3 months of living expenses. If you want to feel more secure or are the sole earner, consider saving up to 6 months.
Consider other savings buckets for: kids’ education, home remodels coming up, saving for a home purchase, a tax reserve for what you might owe, etc.
The goal of these reserves is to create a stable home for expenses coming up in the next year (to a few) instead of being at the mercy of the stock market.
High-interest savings accounts may offer better returns on cash during a volatile time in the stock market.
How are GSUs treated for tax purposes and why do I need a tax reserve?
At Vesting
GSUs are generally taxable as ordinary income (like your salary) when vested. This income, and any tax withheld (federal and state) at vest, are reported on your IRS Form W-2 in the year the units vest to you.
Example: If your salary is $150,000 and you had GSUs vest at a value of $100,000 for the year, you received $250,000 of total compensation. So you would see the total on your W-2 Box 1 as $250,000.
There is an information section of the W-2 that will show the RSUs amount further broken out.
This is why maintaining your trade confirmation or statement from the custodian (i.e. Morgan Stanley) is important. You will need to know your adjusted basis in the shares held after vesting.
If you miss those details on the supplemental detail to the IRS Form 1099-B for your stock account, then you could be paying doubled up taxes.
Some employees are surprised when 40% of their vested shares are sold for tax withholding purposes. Others end up with a surprise when they owe the IRS money on their tax return!
This happens because tax withholding ≠ tax due. Stock compensation is withheld at only 22% federally on the first $1M in stock/bonuses, which may differ from your actual effective tax rate in the end. If your effective tax rate is higher than 22%, be sure to set aside a higher percentage to help fund the tax bill.
At a state level, this can vary. Some states have a flat income tax, while other states (like California) have a slightly different withholding rate from tax rate. This means you may owe some taxes at year end.
At Sale
If you select for your shares to sell at vesting, then things are a little easier for keeping up with the adjusted basis.
If you decide to hold onto your shares after vesting, your stock will be treated like other investments. After vest, the swings in the stock price will count towards capital gains /losses on your tax return. This means you may owe more taxes on sale (if the stock appreciates beyond the vest value).
Since you already paid ordinary income taxes on the value at vesting, your basis will be the fair market value from your vest date. The type of capital gains tax will be determined based on the length of time you hold the shares from the vesting date as well. Long term capital gains rates apply when you hold the stock more than one year from the vesting date.
Example: Using the above example, your basis in the shares would be $100,000. If you sold the shares for $200,000 at a later date, you would be subject to capital gains tax on $100,000. Depending on the time held, you would pay short term or long term capital gains tax (and potentially the net investment income tax).
However, if you hold the stock and the price drops below the value at vesting, you may recognize a loss. You may be able to use those losses to offset capital gains from your company stock. Losses greater than current capital gains offset income up to $3,000 a year. Any unused losses carry forward to future years. Unfortunately, you can not claim the taxes paid at vesting back. This is one risk of many encountered in holding your company stock long term.
Example: Following with the above example, if your basis in the shares is $100,000 and you sold the shares for $75,000 at a later date, you would have a loss of $25,000. Depending on other investment sales, you may be able to offset this against other investment gains or not. If you do not have any other investment sales during that tax year, you would only be able to claim $3,000 of capital gains loss on your tax return. The remaining $22,000 loss would carry forward to future tax return.
For Googlers, this wouldn’t happen unless you sold all stock and were no longer receiving GSUs monthly. For most Googlers, any loss on your stock sale would be considered a wash sale.
What is a wash sale?
A wash sale is an IRS rule that prevents a loss being taken on the sale of a stock if you repurchase that stock within the same 30 day time period.
This is where monthly vesting can hurt. Because the majority of your vests will be within a 30 day time period, your sales are more likely to be subject to this rule. So please do not consider losses on your stock useable against your gains until you look at the Form 1099-B after year end. This form should show how many of those losses were considered ‘wash sales’ and disallowed for use on your tax return.
The good news is that you will get to use it eventually. For now, it is built into the basis of your current Google shares until shares are sold and no more vest within a 30 day period.
It’s complicated.
Interested in learning more about our thoughts on Google for employees? Check out our page here.
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
