Restricted Stock Units
Published on October 22, 2024
Updated on November 04, 2024
by Clark Stott
Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.
Table of Contents
What are Restricted Stock Units?
Restricted Stock Units (RSUs) are shares of a company’s stock specifically allocated for employee compensation. They are usually part of an employment contract but are not granted immediately to the employee.
RSUs are issued to employees through a vesting plan and a distribution schedule after they achieve performance milestones or remain with their employer for a particular length of time.The average vesting period is 3-5 years.
My employer offered me Restricted Stock Units (RSU). Are they good for US citizens working abroad?
Restricted stock units are a beneficial form of compensation that can lead to potential financial gains. Still, you must consider the effect of complying with two government tax systems, the US and where you currently reside.
How does the distribution schedule for Restricted Stock Units work?
Here are some structures to be aware of:
- Cliff vesting: All RSUs vest at once after a specified period, usually 1 to 3 years.
- Graded vesting: RSUs vest in installments, commonly used by both US and foreign companies.
- Monthly or quarterly vesting: Some companies offer more frequent vesting schedules, typically used for shorter-term projects or more flexible compensation packages.
- Performance-based vesting: RSUs vest when specific performance metrics are achieved, often seen in senior or high-level roles.
- Accelerated vesting: In cases of company acquisitions or other significant corporate events.
What is the difference between RSUs and stock options?
Restricted stock units are actual units of company stock reserved for employee compensation so employees don’t have to pay for them. Since each has an inherent value, they are a slightly more stable alternative to stock options.
If you receive 5,000 RSUs at US$5 per share, they’re worth US$25,000. If the price rises to US$7 by the vesting period, they’re worth US$35,000. If it drops to US$2, they’re worth US$10,000. However, you would still get something. You would only get nothing from your RSUs if the company’s share price became zero.
Stock options have no actual value, as you are not given actual value but simply an option to buy and sell company shares at a specific price later.
With stock options, if you get the option to buy 5,000 shares at US$5 each, it’s worthless unless the price rises. If the price goes up to US$7, you can buy at US$5 and sell at US$7 for a US$10,000 profit. If the price drops to US$2, the option is useless.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file US tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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How do I account for RSUs in my income?
RSUs are taxed as income once they are vested, until then, they have no tangible value. The taxable value will be determined by the share price at the time of vesting and a portion of the shares is withheld to pay income taxes.
Upon receiving the net shares, the employee has the right to hold or sell them.
Can I sell my RSUs while I’m abroad?
Yes, you can sell your RSU’s upon vested or you can hold and sell for additional income. You may need to consider the tax rate jurisdiction on the country where you’re residing.
Some countries have higher tax rate for ordinary income and capital gains such as the EU countries. There are also a few countries that do not tax your investment gains at all as long as that money never enters their country.
How can I avoid double taxation upon selling my RSUs?
You can find out whether your country of residence has a tax treaty with the US to avoid double taxation. While you will likely still need to pay capital gains tax in the US, you might be subject to a lower capital gains tax rate locally because of the treaty.
If you hold onto your RSUs and earn dividends from them, you might need to report this on your local tax return and check if you can apply a treaty rate.
What if there is no tax treaty between US and my host country?
Even when there is no income tax treaty, you can still claim Foreign Tax Credit (FTC) in the US on the same income that you’ve paid foreign taxes on.
In addition, you can research about the specific tax laws in your host country to further understand your local tax responsibilities to avoid double taxation.
In any case, be sure to do your research and consult with a financial advisor or tax professional for your specific circumstances.
Can I diversify my portfolio using RSUs?
Yes, once you claim full ownership of the stocks upon vesting, you can add them to your portfolio to diversify your investments and potentially enhance your returns.
It’s good to take note that US expats may be subject to regulatory limits when it comes to holding certain stock-based investments. This may not be an issue for RSUs specifically, but since it is wise to have a diversified portfolio, US citizens who hold RSUs should know about restrictions on other investments they may wish to make.
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