For one motive or one other, it’s possible you’ll end up packing up and transferring to a different state whereas nonetheless working on your employer. Maybe you’re given the chance to work remotely, your partner is pursuing a profession change, otherwise you’ve been relocated to a different company website. Regardless of the case could also be, transferring comes with its personal set of logistical challenges. However there’s one other piece of the puzzle to contemplate as soon as the mud has settled—how transferring would possibly impression your tax scenario.
Whenever you change your state of domicile (primarily your everlasting residence), have you learnt the way it will impression your tax legal responsibility, and extra particularly your fairness compensation?
Relying on the place you progress, you’ll have state-specific laws to abide by. Right here’s a have a look at the overall tips for transferring from one state to a different whereas managing your fairness compensation’s potential tax legal responsibility.
What Is the Significance of Your Domicile?
The time period “domicile” is used to explain the house the place you preserve everlasting residence. It’s a time period primarily used for authorized and tax functions.
For instance, your state of domicile refers back to the state during which you:
- Registered to vote
- Utilized for a passport
- Titled your automobile
- Have a driver’s license
- Pay state taxes
- File lawsuits
Whilst you could personal properties throughout a number of states, sometimes just one state will be thought of your domicile. There is no such thing as a singular motion that ensures your house is asserted your domicile. Quite, you have got to have the ability to show your intent to stay dwelling in that residence completely—even in the event you personal a number of properties. You might spend six months in Connecticut and 6 months in Florida, for instance, however just one is your domicile.
How Your Domicile Impacts State Taxes
As we transfer ahead with the examples under, do not forget that these tips could apply in the event you change your state of domicile (i.e. completely relocate your loved ones residence to a brand new state). Briefly working from a distinct state or shopping for a trip residence throughout the nation doesn’t essentially imply you’ll owe state taxes in your fairness compensation elsewhere.
You’ll usually be required to pay taxes on your state of domicile. Now, this has the potential to complicate issues if you transfer, particularly when fairness compensation is concerned.
Should you transfer to a brand new state and set up a distinct domicile through the vesting interval, it’s possible you’ll be required to separate the tax invoice between each states. It’s particularly essential to grasp what your future state tax invoice might appear to be when transferring to or from a excessive revenue tax state, akin to California.
Let’s take a more in-depth look, based mostly on fairness comp sort.
Restricted Inventory Items (RSUs)
As a reminder, RSUs are taxed as compensation revenue as soon as they vest. They’ll seem in your W-2 on the finish of the yr and are topic to federal in addition to state revenue taxes.
Which state is entitled to gather state revenue taxes as soon as your items vest? The reply will rely on the place you lived and labored whereas these items have been vesting.
To greatest perceive how your RSUs may very well be taxed based mostly on a transfer mid-vesting interval, we’ll display with the next state of affairs.
Let’s say you have got RSUs with a four-year vesting schedule, and 25% of your items vest per yr.
State of affairs A: Assume you reside in Pennsylvania your complete 4 years your RSUs are vesting. Since you didn’t change your state of domicile, 100% of your items shall be topic to Pennsylvania’s state taxes.
State of affairs B: Now, let’s say you reside in Pennsylvania for one yr, however transfer to New York State beginning in 12 months 2.
As a result of your state of domicile modified, solely the proportion of your items that vested whereas dwelling in PA shall be topic to PA state tax. The proportion of items that vested whilst you’re dwelling in New York will as an alternative be topic to New York state tax.
Right here’s how that will look throughout the total four-year vesting interval:
| 12 months 1 – 25% | 12 months 2 – 50% | 12 months 3 – 75% | 12 months 4 – 100% | |
| Domicile | PA | NY | NY | NY |
| Time spent in every state | 1 yr in PA | 1 yr in PA & 1 yr in NY | 1 yr in PA & 2 years in NY | 1 yr in PA & 3 years in NY |
| Share taxed by every state | 100% PA | 50% PA & 50% NY | 33% PA & 66% NY | 25% PA & 75% NY |
Now, let’s have a look at this state of affairs once more utilizing greenback quantities to raised illustrate the revenue topic to every state’s revenue tax.
Assume you’re awarded 4,000 shares complete, with 1,000 shares vesting annually through the four-year vesting interval. Right here’s how the tax legal responsibility could be cut up based mostly in your transfer from Pennsylvania to New York after 12 months 1.
| 12 months 1: 25% | 12 months 2 – 50% | 12 months 3 – 75% | 12 months 4 – 100% | |
| Worth at vesting | $50 | $75 | $125 | $80 |
| Price per 1,000 shares (25%) | $50,000 | $75,000 | $125,000 | $80,000 |
| Domicile | PA | NY | NY | NY |
| Time spent in every state | 1 yr in PA | 1 yr in PA & 1 yr in NY | 1 yr in PA & 2 years in NY | 1 yr in PA & 3 years in NY |
| Proportion taxed to every state | 100% PA | 50% PA & 50% NY | 33% PA & 66% NY | 25% PA & 75% NY |
| Whole taxable RSU revenue per state | $50,000 in PA | $37,500 in PA & $37,500 in NY | $41,250 in PA & $83,750 in NY | $20,000 in PA & $60,000 in NY |
In complete, $148,750 of your vested RSUs over the four-year vesting interval could be topic to PA tax, whereas $181,250 could be topic to New York state revenue tax.
Why You Could Owe Tax in A number of States
As you’ll have seen within the instance above, leaving a state doesn’t imply you’re exempt from paying taxes to it when your RSUs vest. It is because an RSU’s tax legal responsibility is set by what number of days you’re employed within the state from the day the items are granted till the day they vest.
Under is an instance of this, based mostly on the identical assumption that you just moved from Pennsylvania to New York after 12 months 1. (260 days represents a typical working yr, 5 days every week for 52 weeks):
| Grant Date | Vest Date | Days Labored in PA | Days Labored in NY | Whole Work Days |
| 1/1/2025 | 1/1/2026 – 25% | 260 | 0 | 260 |
| 1/1/2025 | 1/1/2027 – 50% | 260 | 260 | 520 |
| 1/1/2025 | 1/1/2028 – 75% | 260 | 520 | 780 |
| 1/1/2025 | 1/1/2029 – 100% | 260 | 780 | 1,040 |
Despite the fact that you lived in New York when your RSUs vested in years 2, 3, and 4, the time these items spent vesting whilst you have been in Pennsylvania nonetheless makes them topic to some PA state tax.
Non-Certified Inventory Choices (NQSOs)
NQSOs are usually not topic to tax once they’re granted or once they vest. Quite, you’ll owe extraordinary revenue tax when you train your choices. How a lot you owe will rely on the train (strike) value and the truthful market worth of the shares on the day they’re exercised—this distinction known as the “unfold.” Whether or not you select to carry onto your choices after exercising or promote them instantly, the total unfold is taxed. As soon as the shares are offered, you’ll once more owe capital good points tax on any revenue.
NQSOs shall be taxed proportionally based mostly on the place you lived and labored whereas the shares have been vesting (just like RSUs). Even in the event you train your choices post-vesting whereas residing in a distinct state, as long as the choices have been vested within the earlier state, that’s the place the revenue tax shall be paid.
Utilizing the instance above, let’s say your NQSOs have been once more topic to a four-year vesting interval. Throughout 12 months 1, you lived in Pennsylvania earlier than transferring to New York. After 4 years, all of your shares have vested, and now you’ve determined to train them. Despite the fact that you’re exercising whereas dwelling in New York (which is a taxable occasion), a portion of your exercised choices shall be topic to Pennsylvania state tax.
Once more, we are able to consult with the desk above, as the precise share of PA vs. NY tax legal responsibility will rely on the variety of days you labored in every state whereas the choices have been vesting.
Incentive Inventory Choices (ISOs)
ISOs are just a little trickier tax-wise since they are often topic to several types of taxation, based mostly on just a few components.
No tax is collected when the choices are granted or once they vest. You don’t owe state revenue tax if you train your ISOs both. Nonetheless, it’s possible you’ll be required to incorporate the unfold (the distinction between the train value and truthful market worth of the exercised choices) when calculating AMT. This will increase the chances you’ll be topic to paying AMT within the yr your ISOs are exercised.
Let’s pause right here and try the potential state tax legal responsibility based mostly on the actions taken to this point (ISOs have been granted, vested, and exercised however not offered).
State of affairs A: AMT just isn’t triggered.
Whereas AMT is widespread with ISOs, it’s not agiven. Within the occasion you don’t set off AMT when exercising your choices, no federal or state AMT is owed.
State of affairs B: AMT is triggered.
It’s attainable, nonetheless, that you just’ll owe federal AMT in your exercised choices.
By way of state AMT legal responsibility, only some states at present implement a state-level AMT:
- California: 7%
- Colorado: 3.47%
- Connecticut: Both 19% of adjusted federal tentative minimal tax or 5.5% of adjusted different minimal taxable revenue, whichever is much less.
- Minnesota: 6.75%
Remember the fact that every state has its personal thresholds, exemptions, and tips. Just like the eventualities above, it’s possible you’ll owe state-level AMT in the event you transfer to or from a state that imposes AMT through the vesting interval—even when the choices are exercised in a distinct state. For instance, in the event you stay in California for a yr earlier than transferring to Texas whereas your choices vest, you should still owe some California AMT as soon as the ISOs are exercised.
Should you stay in states the place no state-level AMT is collected, your exercised choices will solely be topic to federal AMT legal responsibility.
Certified vs. Disqualified Sale
Whenever you promote exercised choices and earn a revenue, the capital good points shall be topic to tax. Relying on the phrases of the sale, nonetheless, you could possibly get pleasure from extra favorable tax remedy.
Once more, let’s assume you progress from Pennsylvania to New York through the four-year vesting interval. Right here’s how that might impression your state capital good points tax legal responsibility based mostly on the kind of sale.
Certified Sale: Should you’ve held your exercised shares a minimum of two years after your grant date and one yr after you exercised them, it’s thought of a certified sale. When that’s the case, the income are usually taxed on the extra favorable long-term capital good points tax charge.
When your shares are offered in a certified sale, the long-term capital good points are sometimes topic to tax solely within the state of domicile on the time of the sale.
Disqualified Sale: If you don’t meet the factors shared above, the shares shall be offered in a disqualified sale. This occurs when the shares are exercised and offered on the similar time. Earnings from a disqualified sale are sometimes taxed as extraordinary and/or capital good points. If this happens, among the revenue could also be taxed based mostly on the proportion of time spent working in every state—just like NQSOs and RSUs, and among the time (the capital good points portion) may very well be taxed solely within the state of domicile.
Managing Your Fairness Comp Throughout a Transfer?
Since transferring between states entails loads of complexity in and of itself,, the very last thing you wish to take into consideration is how this might impression your tax invoice sooner or later. When you’ve got questions on your fairness compensation or different components that might impression your tax invoice within the coming yr, we encourage you to achieve out to our workforce. Ship us a message, or schedule an introductory name with our workforce in the present day.