RSU Tax Offset: Strategies for Lowering Your Tax Bill

An RSU tax offset involves using financial strategies to lower your tax liability in a year when Restricted Stock Units (RSUs) vest. The vesting event creates a substantial amount of taxable income, which can lead to a much larger tax bill than anticipated. The primary goal of an offset strategy is to legally manage and reduce this tax burden by planning for the financial impact of your vesting shares.

The RSU Tax Liability Event

The defining tax moment for RSUs occurs when they vest, not when they are initially granted. At vesting, the shares are no longer subject to a substantial risk of forfeiture and become your property. The value of these shares is then treated as ordinary income, subject to the same tax rates as your regular salary. This income is calculated by multiplying the number of vested shares by the stock’s Fair Market Value (FMV) on the vesting date and is reported on your Form W-2.

To account for this tax, employers are required to withhold a portion of the shares’ value, often through a “sell-to-cover” method where the company automatically sells shares to cover estimated taxes. The issue for many employees arises from the withholding rate itself, as the IRS sets a default supplemental wage withholding rate at a flat 22% for amounts up to $1 million.

This 22% rate is often insufficient because a large RSU vesting can push an employee into a higher marginal tax bracket, such as 24%, 32%, or 37%. When the actual tax rate exceeds the 22% withheld, a significant tax shortfall is created. This difference becomes due when you file your annual tax return, resulting in an unexpectedly large payment owed to the IRS.

Pre-Tax Deduction Strategies

One way to counter increased income from RSUs is to maximize contributions to tax-deferred retirement accounts. These deductions reduce your Adjusted Gross Income (AGI), lowering your total taxable income. For instance, you can increase contributions to a workplace plan like a 401(k) or 403(b). For 2025, the employee contribution limit is $23,500, and those age 50 and over can make an additional catch-up contribution of $7,500.

A Health Savings Account (HSA) is another tool, available to those enrolled in a high-deductible health plan. Contributions to an HSA are made on a pre-tax basis, grow tax-free, and can be withdrawn tax-free for qualified medical expenses. This triple tax advantage helps lower your current taxable income. For 2025, the contribution limit is $4,300 for self-only coverage and $8,550 for family coverage, and individuals 55 and older can contribute an extra $1,000.

Contributing to a Traditional IRA can also provide a deduction. However, be aware of the income limitations on deductibility, especially if you or your spouse are covered by a retirement plan at work. The ability to deduct contributions is phased out based on income, so checking the current year’s thresholds set by the IRS is necessary to ensure you qualify.

Itemized Deduction Strategies

For taxpayers who exceed the standard deduction, itemizing provides ways to offset high income from RSUs. Charitable giving is a primary strategy, and a more impactful method involves donating appreciated stock, including vested RSU shares, instead of cash.

Donating appreciated stock held for more than one year provides a dual advantage. First, you can claim a tax deduction for the full fair market value of the stock at the time of the donation. Second, you avoid paying the capital gains tax that would have been due if you had sold the stock and then donated the cash proceeds.

“Bunching” or “bundling” itemized deductions is another tactic. This involves consolidating several years’ worth of charitable contributions or other deductible expenses, such as state and local taxes (up to the $10,000 limit) and medical expenses, into a single high-income year. Concentrating these deductions into the year your RSUs vest can help you surpass the standard deduction threshold.

Investment-Based Tax Offset Strategies

Investment activities can also be used to counteract the income gain from RSUs. The most direct method is tax-loss harvesting, a strategy for a taxable brokerage account. This process involves intentionally selling investments that have declined in value to “realize” a capital loss for tax purposes.

These realized capital losses first offset any capital gains you have for the year. If you have more losses than gains, you can use the excess capital losses to offset your ordinary income. The IRS allows you to deduct up to $3,000 of net capital losses against your ordinary income—which includes RSU vesting income—each year.

If your net capital losses for the year exceed $3,000, the unused portion is not lost. It can be carried forward to future tax years to offset capital gains or up to $3,000 of ordinary income in each of those years.

Post-Vesting Tax Considerations

Once your RSUs have vested and the initial income tax is paid, the shares become your personal investment property with new tax consequences. The cost basis for these shares is the Fair Market Value (FMV) on the date they vested. This is the same value that was used to calculate the ordinary income you paid tax on.

When you eventually sell these shares, you will trigger a capital gain or loss, calculated by subtracting your cost basis from the sale price. If you sell the shares for more than their value at vesting, you have a capital gain. If you sell them for less, you have a capital loss.

The tax rate applied to any gain depends on how long you held the shares after the vesting date. If you hold the shares for one year or less before selling, the profit is a short-term capital gain taxed at your ordinary income tax rates. If you hold the shares for more than one year, the profit qualifies as a long-term capital gain, taxed at lower rates of 0%, 15%, or 20%, depending on your taxable income.