Implications for NSOs, ISOs, RSUs, and ESPPs When Moving into or out of California/New York

When it comes to stock-based compensation, the tax implications can vary depending on your location and the type of stock option or plan you hold. If you’ve recently moved into or out of California/New York, understand how Non-Qualified Stock Options (NSOs), Incentive Stock Options (ISOs), Restricted Stock Units (RSUs), and Employee Stock Purchase Plans (ESPPs) are taxed in different scenarios is crucial. In this article, we’ll explore these tax considerations in an organized manner.

Understanding the Tax Implication on Stock-based Compensation When You Moved into or out of California:

Non-Qualified Stock Options (NSOs)

Taxation on the Exercise Date:

• • California will tax the wage income to the extent services were performed in California from the grant date to the exercise date.
  • Formula: CA wage income = (CA days / Total days) * (FMV – Exercise Price) * Number of Shares

Taxation on the Sale Date:

• • The taxpayer’s state of residence taxes 100% of the capital gain exceeding the original FMV on the exercise date.

Incentive Stock Options (ISOs)

Taxation on the Exercise Date:

• • If the stock is not sold in the year of exercise, make an AMT adjustment to the extent services were performed in California from the grant date to the exercise date.
  • Formula: AMT adjustment = (CA days / Total days) * (FMV – Exercise Price) * Number of Shares

Taxation on the Sale Date (Qualifying Disposition):

• • If sold within 1 year of the exercise and 2 years of the grant, the state of residence taxes 100% of the capital gain exceeding the original FMV on the exercise date.

Taxation on the Sale Date (Disqualifying Disposition):

• • California taxes wage income based on services performed from grant to exercise date.
  • Formula: CA wage income = (CA days / Total days) * (FMV – Exercise Price) * Number of Shares
  • The taxpayer’s state of residence taxes 100% of the capital gain exceeding the original FMV on the exercise date.

Restricted Stock Units (RSUs)

Taxation on the Vesting Date:

• • California taxes wage income based on services performed in the state from the grant date to the vesting date.
  • Formula: CA wage income = (CA days / Total days) * FMV * Number of Vested Shares

Taxation on the Sale Date:

• • The taxpayer’s state of residence taxes 100% of the capital gain exceeding the original FMV on the vesting date.

Employee Stock Purchase Plans (ESPPs)

Taxation on the Sale Date (Qualifying/Disqualifying Disposition):

• • California taxes ordinary income based on services performed from grant to exercise date.
  • The taxpayer’s state of residence taxes 100% of the capital gain.

Understanding the Tax Implication on Stock-based Compensation When You Moved into or out of New York:

New York’s tax regulations and requirements for the allocation of equity income are similar to those in California but with specific nuances. In addition to the standard allocation procedures, New York offers Form IT-203F Multi-Year Allocation for situations that involve certain income related to professions, occupations, and compensation from equity-based instruments like stock options, restricted stock, and stock appreciation rights.

• Ordinary Income Allocation: If you are a nonresident who received income from a profession or occupation that was carried out both within and outside of New York State, you may encounter scenarios like termination agreements or covenants not to compete. These situations may lead to income allocation complexities. Form IT-203F is designed to help you accurately allocate such income between New York and other jurisdictions to determine the appropriate tax liability.
• Equity Compensation Allocation: Nonresidents and part-year residents of New York who received compensation from equity-based instruments such as stock options, restricted stock, or stock appreciation rights are subject to specific allocation rules. If you provided services both within and outside of New York State during the period from grant to vest of these options, stock, or rights, Form IT-203F allows you to allocate the income generated from these instruments accurately. This allocation is crucial to ensure that you are only taxed on the portion of income that corresponds to the services performed within New York State.
• Box 16 Reporting Requirement: Unlike many other states, New York mandates that all earnings from a tax year must be reported in box 16 of the W-2 form, regardless of whether the earnings were obtained within the state or another state. This requirement ensures that the wages reported in box 1 for federal tax purposes are consistent with the wages declared for New York State in box 16.
• Preventing Excessive Taxation: Due to New York’s strict reporting requirement for W-2 box 16, it becomes crucial to accurately allocate incomes derived from equity-based compensation. Failing to do so could result in over-taxation by New York State on income that was earned outside of the state’s jurisdiction. By properly allocating the income based on the services performed in New York versus other locations, you can prevent excessive taxation and ensure that you are only taxed on income that is attributable to the state.

Understanding Other State Credit:

When dealing with equity income and relocating across state lines, understanding how state tax credits work is essential to mitigate potential double taxation. For example, RSUs are typically taxed upon vesting, and the taxation is usually based on the state of residence at the time of vesting. However, when relocating between states, the situation becomes more complex, particularly if RSUs have vested both before and after the move.

Let’s consider a scenario: You were a resident of California (CA) or New York (NY) when a portion of your RSUs vested, and then you relocated to a state with lower or no income tax. Now, a subsequent portion of your RSUs vests post-relocation. The question arises: How are the taxes on the newly vested RSUs determined?

In this case, your new state of residence may provide you with a credit for the taxes you paid to CA/NY on the RSUs that vested before your move. This credit helps to prevent the double taxation of the same income—once in the state where you originally earned it and again in your new state of residence.

For example, if you’re now a resident of New Jersey and you vest a portion of your RSUs post-relocation, New Jersey might allow you to claim a credit for the taxes you paid to CA/NY on the previously vested portion. This credit effectively reduces the tax from the RSUs in your new state.

It’s important to note that not all states have the same rules for granting tax credits, and some might have limits on the extent to which they can be claimed. Furthermore, some states may require you to provide documentation or proof of taxes paid to the source state. Given these variations, a thorough assessment of your unique circumstances is important to establish the most effective course of action.

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Relocating between states while holding RSUs, ISOs, NSOs, or participating in an ESPP can lead to complex tax implications. Understanding how each type of stock-based compensation is treated in both your current and prospective state is crucial to making informed decisions and minimizing potential tax burdens. At Dimov Tax, we will provide you with the guidance needed to navigate these intricacies and ensure that your relocation doesn’t lead to unintended tax consequences. Simply reach out to us below to learn more about what you can do to minimize your tax liabilities.