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Equity compensation taxes often surprise tech professionals because company withholding rarely covers the full bill. RSUs are taxed as income at vesting (not sale), ISOs can trigger Alternative Minimum Tax (AMT), ESPP shares lose benefits if sold too soon, and moving states mid-vesting can create unexpected liabilities. To avoid traps, calculate your true tax rate, sell systematically to cover obligations, and coordinate with a tax and CFP® professional to manage timing, diversification, and cash flow.
Key Takeaways
- RSU vesting creates immediate tax liability - expect 35-50% total tax rates including federal, state, and payroll taxes on full vesting value, requiring cash planning regardless of whether you sell.
- Company withholding typically covers only 22% federal - actual tax obligations often exceed withholding by $5,000-15,000+ annually, creating surprise tax bills for unprepared recipients.
- ISO exercises can trigger devastating AMT exposure - Alternative Minimum Tax up to 28% applies to exercise spread even without regular income tax, potentially costing $20,000-50,000+ on large exercises.
- State tax implications vary dramatically from 0% to 13.3% - significantly affects optimal exercise timing, holding periods, and geographic planning for equity compensation recipients.
- Systematic selling strategies outperform emotional decisions - planned diversification approaches reduce concentration risk while optimizing tax treatment across multiple years.
- Professional tax planning becomes essential for equity compensation exceeding $100,000 annually - complexity and potential savings can more easily justify expert guidance for optimization and mistake prevention.
Why Equity Tax Planning Matters
For some tech employees, equity compensation can make up 30–70% of total income. Mismanaging the tax rules can easily cost five or even six figures in surprise bills, penalties, or missed opportunities. With proper planning, you can turn equity into long-term, tax-efficient wealth.
Equity Compensation at a Glance: RSUs vs. Stock Options vs. ESPPs
The 7 Most Costly Equity Compensation Tax Traps
Tax Trap #1: Believing RSUs Are Taxed at Sale
The trap: Many think RSUs are like regular stock. They’re not. Taxes hit at vesting, even if you don’t sell.
Example: Marcus in California vested $80K in RSUs. Withholding covered ~28%, but his true rate was 35%. Result: a $5,400 bill at filing.
Fix:
- Plan to sell 35–50% of vested shares to cover real taxes.
- Use a RSU calculator before each vesting.
Tax Trap #2: Panic-Selling Everything at Vesting
The trap: After learning taxes hit at vesting, some sell 100% immediately.
Example: Sarah sold $120K of RSUs in one year, pushing her into the 32% bracket and costing an extra $6,400 in taxes.
Fix:
- Use a systematic selling plan (e.g., sell 50% at vesting, hold 50% for capital gains).
- Spread sales across multiple years to avoid bracket creep.
Tax Trap #3: ISO Exercises That Trigger AMT
The trap: ISOs feel tax-free at exercise — until AMT hits.
Example: David exercised ISOs with a $150K spread. Regular tax: $0. AMT owed: $42K on illiquid stock.
Fix:
- If exercising ISO’s, consider working with someone that understands equity compensation planning, as timing AMT exposure can potentially save you thousands of dollars.
- Exercise gradually across years.
- Consider lower-income years for large exercises.
- See IRS AMT guidance.
Tax Trap #4: Wash Sale Rule Violations
The trap: Selling stock at a loss while new RSUs or ESPP shares arrive can void your tax benefit. Check your vesting calendar before loss harvesting company stock. If bonus/award shares (including RSUs when delivered) arrive within ±30 days, wash-sale rules can disallow the loss—even if your broker doesn’t report it automatically.
Example: Jennifer harvested a $10K loss, but new RSUs vested within 30 days. Loss was disallowed.
Fix:
- Check vesting calendars before tax-loss harvesting.
- Wait 31+ days between selling at a loss and receiving new shares.
Tax Trap #5: Multi-State Tax Complications
The trap: Moving states doesn’t always free you from old obligations.
Example: Alex worked in California (13.3% tax), then moved to Texas. California still taxed equity linked to his California-based work period. Surprise bill: $15K+.
Fix:
- Understand income sourcing rules before relocating.
- Time option exercises carefully around state moves.
- Keep records of work locations and grant dates.
Tax Trap #6: ESPP Qualified Disposition Misses
The trap: Selling ESPP shares too early converts tax-favored gains into ordinary income.
Example: Tom sold after 6 months, losing ~$1,200 in potential savings.
Fix:
- Track both grant and purchase dates.
- Hold at least 2 years from grant and 1 year from purchase for best treatment.
Tax Trap #7: Concentration Risk from "Never Selling"
The trap: Holding stock forever to avoid taxes often destroys more wealth than it saves.
Example: Lisa held $400K in company stock. A 40% decline wiped out $160K — far more than the $60K tax she was trying to avoid.
Proof: Multiple studies show most individual stocks underperform broad indexes over time—another reason to diversify concentrated company stock
Fix:
- Limit company stock to ~10% of net worth.
- Diversify even if it means paying taxes.
- Focus on after-tax wealth, not tax avoidance.
Framework: How to Turn Equity Into Tax-Efficient Wealth
- Calculate your true tax rate
- Include federal, state, and payroll taxes.
- Don’t rely on company withholding.
- Build a systematic selling plan
- Sell ~40–60% at vesting to cover taxes and reduce risk.
- Hold the rest for long-term gains if it fits your risk tolerance.
- Time option exercises wisely
- Spread ISOs across multiple years.
- Exercise during low-income periods.
- Model AMT using Form 6251 before exercising
- Use tax-efficient strategies
- Donate appreciate stock to charities.
- Pair gains with losses in taxable accounts.
- Consider Roth conversions in low-income years.
- Coordinate with a professional
- If annual equity exceeds $50k, or if you’re facing AMT/multi-state issues, professional tax planning can often save more than it costs.
Scenario Examples
Tech professional in California (RSUs + ISOs)- Emily earns $250K salary + $200K RSUs annually at a Bay Area startup. By selling 50% of each vest, she covers her tax bills and reduces stock risk. She exercises ISOs gradually each year to avoid AMT spikes, guided by a CFP® professional and CPA.
Dual-income family relocating (RSUs + ESPP)- Mark and Jenna earn $400K combined, with RSUs vesting while living in California. They’re moving to Texas. By timing their exercises and documenting work history, they limit California’s tax reach and optimize ESPP holdings for long-term gains.Emily earns $250K salary + $200K RSUs annually at a Bay Area startup. By selling 50% of each vest, she covers her tax bills and reduces stock risk. She exercises ISOs gradually each year to avoid AMT spikes, guided by a CFP® professional and CPA.
*All examples are for illustrative purposes only and do not depict actual client scenarios.
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Frequently Asked Questions
When do I owe taxes on RSUs — at vesting or at sale?
At vesting. The full market value is taxed as ordinary income, even if you hold the shares.
Can I avoid AMT on ISO exercises?
Not entirely. But you can minimize it by spreading exercises across years, using AMT calculators, and exercising in lower-income years.
What’s the best RSU selling strategy?
Many sell 40–60% immediately to cover taxes and diversify, then hold the rest for long-term gains. The right mix depends on your goals, cash flow, risk appetite, and tax bracket.
How do state taxes affect equity compensation?
Top state income tax rates reach 13.3% in California; several states levy no individual income tax (e.g., AK, FL, NV, SD, TN, TX, WA, WY, NH)
Do I need a professional if my equity comp is under $100K per year?
Probably not — simple RSU cases can often be handled with calculators. Above $100K or with ISOs, ESPPs, or relocations, professional guidance can prevent costly mistakes.
About The Author
David Jackson, CFP®, is a Senior Financial Planner at Domain Money with 15+ years of experience helping professionals navigate equity compensation, retirement, and tax strategies. He’s guided hundreds of clients through RSU and stock option planning, home purchases, and long-term wealth building. David believes money should empower—not intimidate—and brings an approachable, coaching style to every plan.
About Domain Money
Domain Money is a flat-fee financial planning firm built for high-earning professionals who want to make smarter money moves with confidence. Our CFP® professionals create personalized, integrated strategies that cover taxes, investments, retirement, real estate, equity compensation, insurance, and more—all for one transparent membership fee. Unlike traditional advisors who charge based on assets, we provide unbiased advice, actionable recommendations, and ongoing guidance designed to evolve with your life.
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied on for, investment, tax, legal, or accounting advice. Please consult your own financial advisor or tax professional before making any decisions. Domain Money does not provide investment advisory services or sell financial products. Domain Money is a Registered Investment Advisor with the SEC.
