When Should You Sell Your RSUs? Maximize your timing as a U.S. Citizen in Israel

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When Should You Sell Your RSUs? Maximize your timing as a U.S. Citizen in Israel

 

Why is Timing Everything?

 

Navigating Restricted Stock Units (RSUs) can often feel like walking a tightrope, especially for U.S. citizens working in Israel. The timing of when to sell your RSUs can significantly impact your tax situation and how much you get to keep, turning it into a high-stakes decision. Sell too soon, and you might miss out on substantial stock growth, potentially leaving significant money on the table. Wait too long, and you could find yourself entangled in a tax labyrinth, with over 85% of your income eaten up by taxes.

This delicate balance raises a critical question: When is the right time to sell your RSUs to maximize gains while minimizing tax liabilities? Let’s go through the essential items to keep in mind:

 

How Israeli taxes work with 102 Plans

 

Under Israel’s 102 trustee capital gain plans, the tax implications at the moment of vesting do not trigger a tax event. Meaning, as your RSUs transition into actual shares, you’re not immediately liable for taxes.

However, when you decide to sell your shares, the tax can change significantly. Here’s what you need to know about the tax implications of selling shares obtained through RSUs under a 102 plan:

  • Post-Two-Year Period: The tax is bifurcated if you sell your shares two years from the original grant. You’re taxed at the ordinary income rate based on the share’s average price 30 days preceding the grant at ordinary rates up to 50%. Any profit realized beyond this is taxed as capital gains at a rate of 28%.
  • Pre-Two-Year Holding Period: Selling your shares before the two-year mark significantly alters the tax treatment. In this scenario, all the sale proceeds are considered ordinary income, foregoing the capital gains distinction.

This clearly means it makes sense to hold off from selling before you hit that two-year mark. However, you need to balance it along with the U.S. tax implications.

 

How the U.S. Taxes RSUs

 

The U.S. tax treatment of RSUs is very different than it is for Israeli taxes.

  • Vesting of RSUs: The pivotal tax moment for RSUs in the U.S. comes at vesting. RSUs are converted into actual shares and are recognized as taxable income at this juncture. The fair market value of these shares on the vesting date is what you’ll be taxed on, and this amount is treated as ordinary income. Depending on your total income, this could be taxed as high as 37% at marginal rates. Being prepared for this tax obligation is essential, as it can significantly impact your financial situation.
  • Sale of Shares: The next phase of tax considerations occurs when you decide to sell the shares acquired through vested RSUs. The tax implications at this stage are centered around capital gains or losses, which are determined by the difference between the sale price and the fair market value of the shares at the time of vesting. Selling the shares immediately after they vest typically results in negligible capital gains or losses, given the short timeframe between vesting and sale. However, if you choose to hold onto the shares and their value fluctuates, you will realize a capital gain or loss upon selling. This aspect underscores the importance of timing and market conditions in your decision-making process regarding RSUs.

If you decide not to sell any of your vested RSUs for the first two years, you may end up paying U.S. tax in the first two years of vesting and then paying Israeli taxes in year three or later when you sell. One will not give credit for the other, and you can end up with double taxes way higher than the Israeli 50%. So, does it make sense to sell them as soon as they vest, even within the first two years? Not necessarily.

 

Combining the two countries for the best results:

 

Even if you need to sell some of the vested shares in the first two years and pay higher Israeli taxes, you don’t want to sell all of them. Instead, you should analyze how many need to be sold to pay the Israeli tax of 50% on the portion sold and cover the U.S. tax of 37% on the whole vesting.

The crux of managing RSUs across U.S. and Israeli taxes lies in pre-emptive and informed tax planning. Understanding your foreign tax credit carryovers is pivotal. For instance, consider a scenario where your Israeli income incurs $50,000 in local taxes against a U.S. tax obligation of $40,000 on the same income. The excess $10,000 paid in Israel offsets your U.S. tax liability and provides a surplus that can be applied against future tax obligations, such as those arising from RSU vesting.

In the context of RSUs, let’s say the vesting results in an additional $8,000 of U.S. tax liability. The previously mentioned $10,000 surplus in Israeli taxes paid can be utilized to neutralize this U.S. tax obligation, eliminating the need for further payments to the US IRS for that tax year. Moreover, the flexibility of foreign tax credits allows for the carryforward of unused credits for up to 10 years, providing a buffer for future tax liabilities.

The synergy between U.S. and Israeli tax regulations, particularly concerning RSUs and foreign tax credits, underscores the importance of proactive tax planning. By carefully navigating these rules, you can significantly mitigate your tax burden and enhance the value derived from your RSU compensation.

To plan your specific situation and know how to act with your RSUs, contact us.

 




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