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RSUs and the Expatriation Tax

RSUs and the Expatriation Tax

By Anthony Diosdi

A restricted stock unit (“RSU”) is a form of stock based compensation used to reward employees. Restricted stock units vests at some point in the future. Unlike stock options, RSUs have some value upon vesting. That is, unless the underlying stock becomes worthless. An RSU is a grant whose worth is based on the value of the company issuing the stock. Until a grant of RSUs vest, there is no U.S. tax consequence. In other words, until an RSU vests, it is nothing more than an unfunded promise to issue a share to the holder of the grant until some point in the future.

The U.S. Tax Consequence of the Vesting of an RSU

Once an RSU vests, the recipient is taxed on the value of the shares at the time of the vesting. They are subject to taxation at ordinary income rates plus applicable state income tax and social security taxation. RSUs will be subject to federal income tax up to a maximum rate of 37 percent on the fair market value of the shares issued to a recipient on the date of vesting. A recipient may also be subject to social security contributions (i.e., FICA, including Medicare at a rate of 1.45 percent (no contribution ceiling) and Old-Age, Survivors and Disability Insurance at a rate of 6.2 percent to the extent of a recipient’s income for the year that has not exceeded the applicable contribution ceiling of $142,800 (for the 2021 tax year). Further, a recipient will be subject to additional Medicare taxes at a rate of 0.9 percent on wages (income attributable to vested RSUs) that exceed $200,000 ($250,000 for spouses filing jointly) in the calendar year 2021 calendar year.

The U.S. Tax Consequences of Selling an RSU

When a recipient subsequently sells the shares acquired upon vesting of an RSU or RSUs, the recipient will be subject to capital gains tax. The taxable amount will be the difference between the sale price and the fair market value of shares when issued to the recipient at vesting.

If a recipient holds shares acquired at vesting for a period of less than 12 months before selling them, gains will be taxed at short term capital gains rates which are generally taxed at the same rates as ordinary income. If a recipient holds shares acquired at vesting for more than 12 months before selling them, any gain arising at sale will be taxed as long-term capital gains at a flat rate of either 15 percent or 20 percent depending on the recipient’s income level and filing status. Recipients who earn between $40,401 and $445,850 (between $80,801 and $501,600 for spouses filing jointly) (for the 2021 tax year) will pay long-term 20 percent long-term capital gains rates.

The ExpatriationTax Consequences of RSUs

RSUs are treated as deferred compensation for purposes of the expatriation or exit tax. A deferred compensation plan may be treated as either an eligible or ineligible. An eligible deferred compensation plan is any deferred compensation item with respect to which: 1) the payor is either a U.S. person or a non-U.S. person who elects to be treated as a U.S. person for purposes of Section 877A(d)(1) of the Internal Revenue Code; and 2) the covered expatriate notifies the payor of his or her status as a covered expatriate and irrevocably waives any right to claim withholding under any treaty with the United States.

If a deferred compensation qualifies as an eligible compensation item, the payor must deduct and withhold 30 percent of the taxable payment (i.e., any payment to the extent it would be includible in gross income of a covered expatriate if such person continued to be subject to tax as a citizen or resident of the United States). When RSUs are classified as compensation that is deferred and eligible, the RSU is not taxed at expatriation. Instead, typically, the expatriating individual is subject to a 30 percent withholding tax upon receiving payment from the RSUs.

The exit tax consequences are different when a person receives RSUs from a foreign deferred compensation plan or through any deferred compensation item that is not an eligible deferred compensation item. With respect to any ineligible deferred compensation items, an amount equal to the present value of the covered expatriate’s accrued benefit is treated as having been received by the covered expatriate on the day before the expatriation date as a distribution under the plan and must be included on the covered expatriate’s Form 1040 for the portion of the taxable year that includes the day before the expatriation date. In other words, if a covered expatriate receives RSUs through an ineligible deferred compensation plan, he or she could be subject to the exit tax on RSU shares that have yet to vest.

We have substantial experience advising clients ranging from small entrepreneurs to major multinational corporations in cross-border tax planning and compliance. We have also provided assistance to many accounting and law firms (both large and small) in all areas of international taxation.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.