EP 84 - What is an RSU & How Can I Eliminate the Taxes From It?

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Restricted Stock Units (RSUs) create significant tax challenges for high-income earners, as you're taxed on compensation that doesn't hit your bank account. Strategic tax planning can transform this liquidity problem into wealth-building opportunities through leveraged tax strategies that deliver immediate tax savings.
• RSUs tax you on company stock compensation without providing immediate cash flow
• Simply selling the stocks provides liquidity but misses tax optimization opportunities
• Advanced charitable deduction strategies can provide 2-3x return on investment through tax savings
• Equipment rental investments allow purchase with 10% down while generating depreciation to offset W-2 income
• Solar investments provide both depreciation benefits and tax credits
• Short-term rentals with material participation can reduce W-2 tax burden
• Oil and gas investments typically provide 80-90 cents of tax deduction per dollar invested
• High-income earners can offset up to $600,000 of W-2 income with strategic investments
• Implementation before year-end is crucial for maximum tax benefits

If you appreciate this and want to learn more, go to ProsperalCPA.com/apply or visit taxplanningchecklist.com for more education on minimizing your taxes.

Chapters

• 0:00 RSU Tax Challenges Explained
• 2:24 Simple RSU Tax Mitigation Techniques
• 3:04 Advanced Tax Strategies for High Earners
• 4:47 Charitable Deduction Strategies
• 6:34 Equipment Rental and Depreciation Benefits
• 8:10 Additional Tax-Saving Opportunities
• 9:48 Final Recommendations and Resources

Transcript

Speaker 1: 0:00

Your tax savings is going to give you all your down payment back. The rest is just profit coming in. It's like you're investing in real estate for free. He was a limited partner, so there was zero risk and he really liked you. This was one of our more risk adverse clients. All right, welcome to the show. I always love nerding out with experts in the world of money and finance.

Speaker 1: 0:25

All right, so you have an RRSU or a reserve stock unit from your employer. What is the tax treatment and how do you mitigate or eliminate the taxes here? Well, first let's dive into what this RRSU is. So the RRSU or reserve stock unit, is essentially what the employer is doing here. Instead of comping you, it's usually some sort of bonus, because they're still giving you your regular wages here, but they're going to compensate you in the form of company stock. Now, one of the reasons they do this here and there's several reasons and incentives but they get a write-off for paying you. Not only do they get a write-off and it's deductible against their taxes, but they don't have to give you cash. They're giving you stock in the company. So they're not losing cash and they're still compensating you here. Now that's great for them, but for you the tax treatment may not be so wonderful here because you are going to pay taxes for that compensation of stock, and the challenge with this is, when you get paid taxes on the compensation of the stock, this might hurt your bank account a little bit here, because you're getting an asset which is stock and your money is leaving your bank account to cover the taxes for this transaction and money is not entering. So you may find it hard to cover the tax bill here, because more money is being withdrawn from your paycheck to cover the tax zone and the RSU, but you're not actually receiving the funds unless you sell that stock.

Speaker 1: 2:08

Here's what you want to think about now if you want to mitigate this situation here from the RSUs, and how we can do some proactive tax planning. Now here's a simple thing that a lot of people do. They say, okay, this stock sounds great, I want my money now, and they just sell the stock. Now, when this happens, let's talk about the tax effects. Usually the tax effects are minimal because the value hasn't changed much between the time they gave you the RSU and the time they sold the stock. So in that instance you have access to the cash from the disposition, sell the stock, cash from the disposition, the sale of the stock and at least now you have money left over from whatever they're taxing you on that transaction. Well, that's all great. But there are some other things I want you to think about here, and we can take this to the next level up when you're really working with a strategic advisor and really being proactive with your tax planning here. You're still paying taxes on that compensation, whether you sell it or not here. So you might find that we often find it, especially with our clients in the West Coast, that they're paying lots of taxes on this transaction here. So what can we do here? So if you're keeping your stock and you're not going to sell it, you're likely going to gravitate towards the tax strategies that are going to allow for greater liquidity.

Speaker 1: 3:29

And now there's a misperception of entrepreneurs can't reduce their taxes and they can't be proactive because all their money is just controlled by payroll and what gets taken out of the W-2, and that's absolutely false, especially when you are a high income earner. So what we find here is folks with RSUs, and we often find that people with RSUs from the W-2s are higher income earners. They gravitate towards the tax strategies that involve more leverage, that involve tax savings that are greater than the cost to create those tax savings. For example, if I were to pay $100 for $200 of tax savings, I'm doubling my money. Those are the types of tax strategies and investment vehicles where a greater portion of the benefit is the tax savings as opposed to the profit generated from those items, because tax savings usually is something that you will experience immediately. But when you invest into other things, like stocks and real estate, et cetera, et cetera, you're going to see the benefit over time, in multiple years before you recoup your money. But usually our tax strategies are going to double your money immediately in year one because of the treatment of those transactions.

Speaker 1: 4:43

So some of the things we do here are advanced charitable deduction strategies. If you're a high income earner doing over $750 a year and you haven't at least considered and you're not aware of charitable deduction strategies, you definitely need to collaborate with someone because you could be leaving millions of dollars on the table here. So these leveraged charitable strategies and valuation charitable strategies where you're using minerals and resources and you're actually controlling, in some instances, the charities that receive it. There's all these vehicles where the cost to invest into resources that are. Eventually a portion could be donated, or the cost to maybe create a structure that finances the delivery of funds to a charitable organization is usually a fraction of the tax savings. So the numbers usually vary depending on various circumstances, but the way it usually works out is imagine paying $100,000 to create anywhere from $200,000 to $300,000 of savings.

Speaker 1: 5:48

We're also aware of and collaborate with someone who raises capital for a real estate investment where you can get a charitable deduction that's going to be two and a half times your investment. So imagine paying $100,000, but you're in a 40% tax bracket federal and state which is very common. If you're in California, it can be more than that. So if you pay $100,000 and you get a deduction that's two and a half times that amount, that's a quarter million dollar tax deduction, and at 40%, that's $100,000 of savings. Essentially, you're investing in real estate for free and get capital gains, cash flow and tax distributions all tax-advantaged ways of building wealth and bringing cash into your pocket. You pay nothing net of taxes to invest into this more tax-advantaged real estate. Also, even if you're a W-2, you can still invest into assets that are rented out and get write-offs that offset your taxes. So obviously there's some restrictions in real estate that we'll talk about in a little bit.

Speaker 1: 6:53

But we do see high W-2s do things that involve financing and purchasing of heavy equipment that is rented out for a profit. So in many instances you only pay about one-tenth down to purchase that equipment. You only pay about one-tenth down to purchase that equipment. So imagine taking that same $100,000 and buying a million dollars of equipment that you can rent out as a part-time hustle. You get the cash flow from the equipment. You also get bonus depreciation from the equipment that can offset your W-2. And, depending on where bonus goes, this can be an incredible return on investment plus future cash flow. Now for you high income earners, we're maxed out at $600,000 to offset your W-2s. So if all your income is W-2, you're maxed out, but still a $600,000 reduction in taxable income is pretty good. You can stack that on top of a charitable deduction strategy or a credit strategy.

Speaker 1: 7:48

Now let's get into tax credit strategies. So with solar we have a combined benefit here of like we talked about earlier. We have these assets that we rent out and we get the depreciation and the write-off to offset up to $600,000 of our income and we get tax credits that can offset your current and prior year taxes. All of these strategies the charitable, the asset rentals and the solar are going to allow you to really preserve your liquidity here, because your liquidity is compromised with RSUs. Your liquidity is compromised by RSUs because you're paying more in taxes but not as much cash is hitting your bank account unless you sell the stock. So you use these more liquidity-friendly tax strategies where the tax savings is greater than the money that leaves your pocket in year one.

Speaker 1: 8:44

Now let's talk about some other things that we still like to consider here that can still reduce your taxes and high W-2 income earners. We still have short-term rentals where you self-manage and you materially participate. You can go into the prior podcast to talk about that very popular strategy to reduce taxes coming out of your W-2. We also have, if your spouse can get real estate professional tax status, those rentals can be combined with cost segregation studies to accelerate depreciation and your short-term and long-term rentals can offset your income. And then, finally, we have oil and gas investing, which I love and also talk to us. We collaborate with lots of other facilitators. We can share with you the numbers and the breakdowns, but the oil and gas essentially what we see, and it can vary but for every 80 to 90 cents per dollar you will get a tax deduction of 80 cents to 90 cents per dollar contributed into the fund, and that can offset your W-2 as well.

Speaker 1: 9:41

So obviously there are lots of things to consider here. If you're a high income earner and you have RSUs, make sure you do this before the end of the year. Don't wait. All right, if you appreciate this and you want to learn more, you know where to go. Prosperal Prosper with an L CPAcom slash apply. Also, if you're not ready to apply and talk to us, go to taxplanningchecklistcom for some more education on what you can be doing to minimize your taxes.