My daughter is recently divorced. Her ex has RSUs from his employer. She was awarded half of his RSU’s that were awarded to him during their marriage. Some of the RSUs vested before the divorce was finalized. The others RSUs will vest over the next two years.
I understand that RSUs are treated as income.
I understand that the unvested RSU’s are treated as income to the separate parties when they vest.
What about the RSUs that vested before the divorce was finalized? The ex’s company has already done “Sell to Cover” on the vested RSUs. The tax withholding is all in his name. The question is: Will my daughter be required to report these shares as income even though her ex has had taxes withheld? Or do these share come to her tax free like marital property does?
The tax withholding that was done at the time of the vesting was merely to cover the taxes that are due because of the vesting.
Unless the divorce decree states something different (and hopefully, if it does, it would require the ex also provide compensation for the taxes that were withheld), the income received and the taxes due will be to the person who owned the RSUs at the time the shares vested. She should be getting the shares without any tax implications, again, unless the divorce decree assigns her the income and tax liability. I will note that the basis will be maintained as the basis at the time of vesting, not as of the date that she received the shares.
I will also note that any unvested shares will still have to follow the company’s rules for vesting. For instance, if the company requires that he remain employed at the company in order for shares to vest, and he does not do so, those shares will not vest to her - she will lose those RSUs.
They had to have a court appointed moderator help with the splitting of the assets. She was fortunate to have a moderator that seemed to favor her positions. If the ex quits or is terminated before the next two vesting dates, he has to compensate her for the lost RSU value.
Usually when RSUs vest, and the employee chooses to have shares sold (really they are withheld) to cover the taxes, it works roughly like this.
Shares vested - 1000
Withholding rate - 22% (assume no state tax for now)
The company retains 220 shares, and remits cash for the tax withholding
Shares distributed - 780
In this case, I would assume that the spouse will receive half of those 780 shares in share form, and will receive half of those 220 shares, their cash equivalent on the day of vesting, in “tax withheld” form.
It may (depending on the actual wording of the decree) become a little more complicated when taxes are filed the next year. If one spouse is in the 24% bracket, and the other is in the 22% bracket, then the higher bracket one should receive more of the tax withheld (if the decree says “equal AFTER taxes”). That’s only a tiny difference, but if one spouse is in the 12% bracket and one is in the 24% bracket, then it would make much more of a difference.
I’m not sure where the tax brackets break, but he makes around 250k while she will make about 50k. Their tax rates will be substantially different. The next two vesting dates are in March of 2026 and 2027.
The lawyer is working on the QDRO so she can receive 1/2 of his 401k. He is not as well informed on RSU’s. The decree says she gets 1/2 of the RSUs but we didn’t think about managing the tax issues.