Tax Implications of Dividing Restricted Stock Units (RSUs) in Divorce

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In divorce, Restricted Stock Units (RSUs) are divided based on a time rule that allocates RSUs awarded to the employee for employment during marriage and after (or before in some cases). The stock shares are granted to the employee on a specific date, and then vest at designated dates after grant. The RSUs are taxed as ordinary income to the employee at the fair market value on the date of vested, just as if the employee got a cash bonus on that date.

Some of the shares vested are immediately sold to cover the withholding of federal and state individual income tax, social security tax, and Medicare tax (as well as some other minor state taxes). The balance of the shares is transferred to the employee’s brokerage account as stock (not cash).

Since some of the RSUs are community property and are distributable to both parties in the property division, so is the tax liability. 

The parties have the option to (1) have the employee report all of the income and withholding on his or her returns and to allocate the withholding and tax (they are not the same thing) internally between the parties or, (2) if it works out advantageously tax-wise, they can allocate the income and withholding and report each on their separate returns. This second way is more cumbersome, since they parties have to inform the IRS and state of their intent to reallocate some income from the employee’s W-2, so this method should only be used if it provides a significant benefit to the aggregate tax liability of the two parties.

Read the full CalCPA article here

Megan Thompson

Megan Thompson is a Certified Public Accountant (CPA), Certified Valuation Analyst (CVA) and is Certified in Financial Forensics by the AICPA (CFF). She leads and mentors a growing staff of accountants to help serve her rapidly expanding client base.

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