How to Optimize Your Taxes as a Microsoft Employee
As a Microsoft employee, your benefits package can significantly reduce your tax debt for the year. Here's how to make the most of these opportunities.
1. Maximize Contributions to Your 401(k)
In 2024, you can contribute up to $23,000 to your Microsoft 401(k) ($30,500 if you’re 50 or older). Contributions are made pre-tax, reducing your taxable income for the year. Your withdrawals are taxed later when you will likely be in a lower tax bracket.
Best of all, Microsoft matches 50% of your contributions up to the $23,000 limit. This means if you contribute the full amount, Microsoft adds $11,500 to your 401(k) for free. (Matching contributions do not apply to the additional $7,500 catch-up contributions for employees aged 50 or older).
This is a great opportunity to lower your taxes now while saving for the future.
2. Use the Mega Backdoor Roth Program
The mega backdoor Roth program lets you invest after-tax dollars in your 401(k) and convert them to a Roth account. Your investments will grow tax-free and allow tax-free withdrawals after retirement. This strategy allows you to invest beyond the standard limits of a 401(k) and gain access to Roth tax benefits regardless of your income level.
3. Sign Up for the Deferred Compensation Plan (DCP)
If you’re a Level 67 employee, you can use the Microsoft DCP to defer a portion of your income until later. Like your 401(k) contributions, this will reduce your taxable income for the current year. Participants can defer up to 75% of their base salary and 100% of their bonus, investing them to grow over time — again, much like a 401(k).
Distributions can be scheduled for a specific date or triggered upon leaving the company, with options to receive lump sums or installments over 3–15 years. Withdrawals are taxed as ordinary income.
4. Take Advantage of the Employee Stock Purchase Plan (ESPP)
Microsoft’s ESPP allows you to purchase company stock at a 10% discount, using up to 15% of your salary making it a valuable benefit.
While the discount isn’t directly tax-deductible, managing your stock sales strategically can reduce your tax burden. For example, holding shares for more than a year before selling qualifies you for long-term capital gains tax rates, which are typically lower than ordinary income tax rates.
By participating in the ESPP and planning your sales carefully, you can maximize your savings and minimize your taxes.
Meet Clients Who Chose Retirement
From Boeing Engineer to world traveler, snowboarder, and mountain biker!
5. Contribute to a Health Savings Account (HSA)
If you’re enrolled in a high-deductible health plan, you’re eligible to contribute to an HSA, which offers a triple tax advantage:
Contributions are tax-deductible
Investments grow tax-free
Withdrawals are tax-free when used for qualified medical expenses
In 2024, you can contribute up to $4,150 for individual coverage ($8,300 for families). Those aged 55 and older can contribute an additional $1,000.
An HSA is one of the most tax-efficient ways to save for future healthcare costs and can also double as a retirement savings tool if you save more than you spend on medical expenses.
6. Manage Your Restricted Stock Units (RSUs)
Microsoft RSUs are a significant part of many employees’ compensation. However, they are taxed as ordinary income upon vesting. To minimize the tax impact, consider increasing your withholding or saving extra in advance.
You can either sell your vested shares right away or hold them to sell later. Selling immediately can help you avoid further market risk, while holding onto them may offer long-term capital gains tax advantages if you believe the stock will appreciate. A fiduciary financial advisor can help you decide which choice is best in your case.
7. Consider Tax-Loss Harvesting
If you have investments outside of Microsoft benefits, tax-loss harvesting can be a powerful strategy to reduce your tax bill. By selling underperforming investments at a loss, you can offset gains from other investments or reduce up to $3,000 of your ordinary income.
However, be mindful of IRS rules, including the wash-sale rule, which prevents you from claiming a loss if you repurchase the same or a substantially identical security within 30 days.
Meet Clients Who Chose Retirement
Setting a retirement date isn’t easy, but it’s a lot easier with a Fiduciary and a plan.
8. Use Paid-Up Additions in Your Life Insurance
Permanent life insurance policies, such as whole life insurance, offer a feature called paid-up additions (PUAs), which can enhance your policy's cash value and death benefit. PUAs allow you to purchase additional fully-paid insurance coverage within your existing policy. This increases both the death benefit and the cash value, which grows tax-deferred over time.
The cash value accumulated through PUAs can be accessed via policy loans or withdrawals. Withdrawals up to your policy's cost basis (the total amount of premiums paid) are generally tax-free. Loans against the cash value are also typically tax-free, provided the policy remains in force.
This strategy enhances the policy’s value, provides a larger tax-free benefit for beneficiaries, and offers flexible, tax-advantaged financial resources. Consult a financial advisor to determine if this approach aligns with your goals.
9. Make Charitable Contributions
Donating to qualified charitable organizations can provide significant tax benefits:
Itemized deductions: If you itemize deductions on your tax return, you can deduct charitable contributions made to eligible organizations, reducing your taxable income.
Qualified charitable distributions (QCDs): If you're 70½ or older, you can make QCDs directly from an IRA to a charity, up to $100,000 annually. This amount counts toward your required minimum distributions and isn't included in your taxable income.
Donor-advised funds (DAFs): Contributing to a DAF allows you to take an immediate tax deduction while distributing funds to charities over time. The assets can grow tax-free within the DAF, potentially increasing the amount available for donation.
By incorporating charitable giving into your financial plan, you can reduce your tax liability while supporting causes you care about.
10. Talk to a Fiduciary Financial Advisor
Planning your financial strategy to optimize your taxes can be challenging. A fiduciary financial advisor can give you reliable advice tailored to your unique needs and goals. Fiduciary advisors are legally obligated to act in your best interest, providing transparent and trustworthy guidance. Your advisor can help you fine-tune your tax planning, investment strategies, retirement preparation, and estate planning — all while giving you true peace of mind.
Fine-Tune Your Taxes and Plan for a Brighter Future
Optimizing your taxes as a Microsoft employee is not just about saving money today — it’s about building a solid financial foundation for the future. By taking full advantage of your benefits package and implementing the strategies outlined here, you can reduce your tax burden while growing your wealth.
At TrueWealth Financial Partners, we specialize in helping professionals like you make the most of their benefits and plan for long-term financial success. Our fiduciary advisors are here to provide personalized, transparent, and reliable advice tailored to your unique situation.
Ready to take your financial planning to the next level? Schedule a consultation with one of our expert advisors today, and let us help turn your financial goals into reality.
Meet Clients Who Chose Retirement
Retiring at 55 takes a special strategy.
FAQs
Can I combine multiple tax-saving strategies in the same year?
Yes, you can combine multiple tax-saving strategies like maximizing your 401(k) contributions, utilizing the mega backdoor Roth, and contributing to an HSA all in the same year. Be mindful of contribution limits and ensure your overall financial plan aligns with your long-term goals. Consulting a financial advisor can help you navigate these strategies effectively.
How does the “sell-to-cover” method work for tax withholding on RSUs?
When your restricted stock units (RSUs) vest, Microsoft typically withholds a portion of the shares to cover applicable taxes, a process known as “sell-to-cover.” For example, if 100 shares vest, Microsoft may sell 22 shares to cover federal taxes, depositing the remaining 78 shares into your account. This method helps manage the immediate tax liability arising from the vesting of RSUs.
How can I maximize the tax benefits of my RSUs?
To optimize the tax impact of your RSUs:
Use RSU income to fund contributions to tax-advantaged accounts like your 401(k) or deferred compensation plan, effectively reducing taxable income.
Consider selling vested shares promptly to diversify your portfolio and manage tax liabilities, keeping in mind potential capital gains taxes if shares are held beyond vesting.
Work with a financial advisor to develop a strategy that aligns with your financial goals and minimizes tax exposure.
Can I deduct moving expenses if I relocate for work at Microsoft?
No, after the 2018 Tax Cuts and Jobs Act, moving expenses are no longer deductible for most employees, unless you are an active-duty military member. However, Microsoft may offer relocation assistance as part of your benefits package, which could offset these costs.
Can I use tax-loss harvesting if I hold Microsoft stock?
Yes, you can use tax-loss harvesting on Microsoft stock or other investments outside your ESPP or RSUs. If the stock has declined in value, selling shares can help offset capital gains from other investments or reduce your taxable income by up to $3,000 annually. Be sure to follow the IRS wash-sale rule, which prevents repurchasing the same stock within 30 days.
Are bonuses at Microsoft taxed differently than regular salary?
Bonuses at Microsoft are taxed as supplemental income, which may be subject to a higher withholding rate. Federal taxes are typically withheld at 22% (or higher for bonuses above $1 million). This is a withholding rate, not the final tax rate, so your actual tax liability depends on your total income and deductions.
Can I contribute to both a 401(k) and an IRA?
Yes, you can contribute to both, but the deductibility of IRA contributions depends on your income level and whether you or your spouse are covered by a workplace retirement plan. If you exceed the income limits for a traditional IRA deduction, you may still be eligible for a Roth IRA or a non-deductible IRA contribution.
Are there any tax credits Microsoft employees should know about?
Depending on your income and circumstances, you may qualify for tax credits such as the Child Tax Credit or Education Credits. While these are not Microsoft-specific, they can significantly reduce your tax liability if applicable. Check eligibility requirements and consult a tax advisor to maximize these benefits.