State Tax Obligations After Relocating from CA to TX or WA
By George Dimov in Tax Blog
State Tax Obligations After Relocating from CA to TX or WA
Tax Responsibilities Amid Remote Work and State Relocation
The rise of remote work, particularly since the COVID-19 pandemic, has prompted many individuals to relocate to states like Texas and Washington, which do not impose state income taxes. However, moving away from a high-tax state such as California does not always mean you are free from California’s tax obligations, especially if you received equity compensation, such as RSUs, ESPPs, ISOs, and NSOs, during your California residency.
California’s Tax Claims on Equity Compensation
Even if you establish residency in a tax-free state like Texas or Washington, California may still assert tax claims over specific forms of income, particularly equity compensation. This applies if you were a California resident when the equity compensation was granted or if the compensation is attributable to services performed in California, regardless of your residency at the time of vesting.
Key Elements on How RSUs Are Taxed in California
Restricted Stock Units (RSUs) are a common form of equity compensation granted to employees, often by tech companies or startups. While RSUs can be a valuable part of an employee’s compensation package, understanding their tax implications—especially in California, a state known for its high tax rates—is crucial. Here’s a detailed look at the California RSU tax rate and how it applies to your earnings.
Taxation of RSUs in California: The Basics
- Grant vs. Vesting of RSUs: No Taxable Event at Grant
- Grant Date: The date when RSUs are awarded to an employee does not trigger any immediate tax liability. California does not tax RSUs at the time they are granted because there is no actual transfer of ownership or receipt of property that has a determinable fair market value.
- Grant Date: The date when RSUs are awarded to an employee does not trigger any immediate tax liability. California does not tax RSUs at the time they are granted because there is no actual transfer of ownership or receipt of property that has a determinable fair market value.
- Vesting of RSUs: The Key Taxable Event
- Vesting Date: The taxation of RSUs in California occurs at the time they vest. When RSUs vest, they are considered a form of compensation. The fair market value of the vested shares on the vesting date is treated as ordinary income, subject to federal income tax, Social Security and Medicare taxes, and California tax on RSUs. If you are a California resident at the time of vesting, or if the income is attributable to work performed in California, the CA RSU tax rate can be as high as 13.3% for high-income earners, California’s maximum state income tax rate.
- Withholding Requirements: Employers are required to withhold taxes on the income from RSUs at the time of vesting. While withholding is typically done at the maximum state income tax rate, the specific rate can vary depending on whether you are a California resident at vesting or if the income is attributable to California-based services. Understanding the CA RSU tax implications is critical.
- Vesting Date: The taxation of RSUs in California occurs at the time they vest. When RSUs vest, they are considered a form of compensation. The fair market value of the vested shares on the vesting date is treated as ordinary income, subject to federal income tax, Social Security and Medicare taxes, and California tax on RSUs. If you are a California resident at the time of vesting, or if the income is attributable to work performed in California, the CA RSU tax rate can be as high as 13.3% for high-income earners, California’s maximum state income tax rate.
- Sale of RSU Shares: Capital Gains Tax
- Post-Vesting Sale: After the RSUs vest and taxes are withheld on the fair market value, any subsequent sale of the RSU shares will trigger capital gains tax.
- Short-Term vs. Long-Term Gains: The capital gain is calculated based on the difference between the sale price and the fair market value at the vesting date. If the shares are sold within one year of the vesting date, they are subject to short-term capital gains tax rates, which are generally higher and taxed at ordinary income tax rates. If the shares are held for more than one year, they qualify for long-term capital gains tax rates, which are generally lower.
- Post-Vesting Sale: After the RSUs vest and taxes are withheld on the fair market value, any subsequent sale of the RSU shares will trigger capital gains tax.
- California’s Approach to Sourcing Income from RSUs
- Residency Considerations: California taxes its residents on all worldwide income, including income from RSUs, regardless of where the work was performed. If an individual is a California resident at the time the RSUs vest, the income from the RSUs is fully taxable by California. Additionally, California may assert tax rights over RSU income if it relates to services performed in the state, even if you are no longer a resident at the time of vesting.
- Non-Resident and Part-Year Resident Considerations: For non-residents or part-year residents, California applies an allocation formula to determine the portion of RSU income taxable by the state. This formula considers the number of days worked in California between the grant date and the vesting date relative to the total days worked during this period. For example, if 60% of the workdays between the grant and vest dates were spent in California, 60% of the RSU income would be subject to California tax on RSUs.
- Residency Considerations: California taxes its residents on all worldwide income, including income from RSUs, regardless of where the work was performed. If an individual is a California resident at the time the RSUs vest, the income from the RSUs is fully taxable by California. Additionally, California may assert tax rights over RSU income if it relates to services performed in the state, even if you are no longer a resident at the time of vesting.
Example: Taxation of RSUs Following Relocation from California
Consider this updated scenario:
|
Event |
Date |
|
Established CA Residency |
01/01/2022 |
|
RSU Grant Date |
04/01/2022 |
|
Relocation Date |
12/01/2023 |
|
RSU Vesting Date |
01/01/2024 |
In this example, the RSUs were granted while you were a California resident, and a portion of the income from these RSUs remains taxable by California. The taxable portion is calculated based on the ratio of workdays spent in California between the grant and vesting dates to the total workdays during that period.
Application to Other Equity Compensation Types
- ISOs and NSOs: For these types of equity compensation, the same allocation principle applies, with the exercise date being used in place of the vesting date.
- ESPPs: The taxable amount is determined by the time frame from the beginning of the offering period to the purchase date.
Key Risks: Double Taxation and Improper Allocation in 2024
Inaccurate allocation of income between states can result in double taxation, especially if you move to a state with its own income tax requirements. To avoid these risks, consult with a California CPA to ensure your equity compensation is correctly allocated on tax forms like W-2s and 1099s. Promptly address any errors by requesting corrected documents from your employer.
Dimov Tax: Expert Guidance in Managing State Tax Complexities
Dealing with the complexities of state tax obligations, especially concerning equity compensation during interstate moves, can be a real challenge. At Dimov Tax, based in San Francisco, California, we specialize in helping clients manage these intricate situations. Our expertise ensures precise tax reporting and helps minimize any unnecessary taxation.
If you need assistance or have specific questions about your circumstances, contact Dimov Tax. We offer personalized solutions to safeguard your financial well-being against the complicated structure of state tax laws.