RSU withholding gaps, the AMT exposure that comes with exercising an ISO, and why equity compensation needs its own conversation before year-end.
If part of your compensation arrives as stock rather than salary, the year-end picture is different from what most planning content describes. Vesting events, exercise timing, and the concentration they create all carry consequences that land in the calendar year they happen — whether or not you have had time to think them through.
RSUs: The Tax Bill Arrives at Vesting
Restricted stock units are taxed as ordinary income the day they vest, based on the share price that day, whether or not you sell anything. That part is widely understood. The part that catches people is withholding.
Many equity plans withhold federal tax at the flat supplemental rate: 22% on the first $1 million of supplemental wages in a calendar year, and 37% above that. If your marginal rate is 32% or 35%, the shares get withheld, the tax piece looks like it’s handled, but a tax liability can surface the following April.
If a large vest happened this year, it’s is worth checking now rather than at filing. Additional payroll withholding is generally treated as paid evenly across the year no matter when it occurs, so a December adjustment can cure a shortfall that an estimated payment made at the same moment would not.
ISOs and the Alternative Minimum Tax
Exercising an incentive stock option can trigger alternative minimum tax even if you sell nothing. The spread between the strike price and the fair market value at exercise is an adjustment under the AMT rules, and a large exercise late in the year can pull you into AMT unexpectedly.
The only way to know the cost in advance is to model the exercise before December 31st rather than after. There is also a planning angle in the other direction. In some years, exercising a smaller number of shares up to the point just below the AMT threshold can be the more efficient path.
If you exercised earlier this year and AMT is now the problem, there is still a December decision available. Selling those shares before year-end is a disqualifying disposition. The spread becomes ordinary income instead, and the AMT adjustment comes off the return for the year. Whether that trade is worth making depends on the numbers, but the option closes December 31.
The Concentration That Builds Quietly
Vesting and exercising tend to leave people holding far more of one company than they would ever choose to buy deliberately. Year-end is a natural checkpoint to revisit that.
It can also be cheaper than people expect. Shares that vested recently can have a cost basis equal to their value at vesting, so selling them soon after produces little or no gain. For older lots carrying a real gain, a loss harvested elsewhere in the portfolio can offset it, which can make diversifying less expensive this month than it might be in February.
The Windward Approach
Equity compensation rarely sits alone on a return. It interacts with other taxable income and with any capital losses harvested elsewhere. We model the whole picture before year-end so an exercise or sale decision gets made with confidence and the tax consequence known rather than discovered.
Windward began as a CPA firm and that heritage is the reason we do this work in-house rather than hand it off. Our advisors and tax professionals sit on the same team and work from the same projection, so the question of what an exercise costs does not travel between two offices and come back in March. Equity compensation is where that matters most. The details that decide the outcome are small and specific, and they are easy to lose in a conversation that stays general.
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