For one cause or one other, chances are 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.
If you change your state of domicile (basically 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 might have state-specific rules to abide by. Right here’s a take a look at the overall pointers 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 by which you:
- Registered to vote
- Utilized for a passport
- Titled your automotive
- Have a driver’s license
- Pay state taxes
- File lawsuits
Whilst you might personal properties throughout a number of states, sometimes just one state may be thought-about your domicile. There isn’t any singular motion that ensures your own home is said your domicile. Somewhat, you might have to have the ability to show your intent to stay dwelling in that residence completely—even if you happen to personal a number of properties. It’s possible you’ll 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, keep in mind that these pointers might apply if you happen to change your state of domicile (i.e. completely relocate your loved ones residence to a brand new state). Quickly working from a special 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 typically be required to pay taxes on your state of domicile. Now, this has the potential to complicate issues once you transfer, particularly when fairness compensation is concerned.
When you transfer to a brand new state and set up a special domicile in the course of the vesting interval, chances are you’ll be required to separate the tax invoice between each states. It’s particularly essential to know what your future state tax invoice might appear to be when transferring to or from a excessive revenue tax state, comparable to California.
Let’s take a better look, primarily based on fairness comp sort.
Restricted Inventory Models (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 models vest? The reply will rely upon the place you lived and labored whereas these models had been vesting.
To finest perceive how your RSUs could possibly be taxed primarily based on a transfer mid-vesting interval, we’ll display with the next situation.
Let’s say you might have RSUs with a four-year vesting schedule, and 25% of your models vest per yr.
State of affairs A: Assume you reside in Pennsylvania all the 4 years your RSUs are vesting. Since you didn’t change your state of domicile, 100% of your models 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 Yr 2.
As a result of your state of domicile modified, solely the proportion of your models that vested whereas dwelling in PA shall be topic to PA state tax. The share of models 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 may look throughout the complete four-year vesting interval:
| Yr 1 – 25% | Yr 2 – 50% | Yr 3 – 75% | Yr 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 |
| Proportion taxed by every state | 100% PA | 50% PA & 50% NY | 33% PA & 66% NY | 25% PA & 75% NY |
Now, let’s take a look at this situation once more utilizing greenback quantities to raised illustrate the revenue topic to every state’s revenue tax.
Assume you’re awarded 4,000 shares whole, with 1,000 shares vesting every year in the course of the four-year vesting interval. Right here’s how the tax legal responsibility could be break up primarily based in your transfer from Pennsylvania to New York after Yr 1.
| Yr 1: 25% | Yr 2 – 50% | Yr 3 – 75% | Yr 4 – 100% | |
| Value 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 |
| Complete 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 whole, $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 might have observed 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 decided by what number of days you’re employed within the state from the day the models are granted till the day they vest.
Under is an instance of this, primarily based on the identical assumption that you just moved from Pennsylvania to New York after Yr 1. (260 days represents a typical working yr, 5 days per week for 52 weeks):
| Grant Date | Vest Date | Days Labored in PA | Days Labored in NY | Complete 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 |
Regardless that you lived in New York when your RSUs vested in years 2, 3, and 4, the time these models spent vesting whilst you had been in Pennsylvania nonetheless makes them topic to some PA state tax.
Non-Certified Inventory Choices (NQSOs)
NQSOs should not topic to tax after they’re granted or after they vest. Somewhat, you’ll owe peculiar revenue tax when you train your choices. How a lot you owe will rely upon the train (strike) value and the honest market worth of the shares on the day they’re exercised—this distinction is known as the “unfold.” Whether or not you select to carry onto your choices after exercising or promote them straight away, the complete unfold is taxed. As soon as the shares are offered, you’ll once more owe capital positive aspects tax on any revenue.
NQSOs shall be taxed proportionally primarily based on the place you lived and labored whereas the shares had been vesting (much like RSUs). Even if you happen to train your choices post-vesting whereas residing in a special state, as long as the choices had 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 had been once more topic to a four-year vesting interval. Throughout Yr 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. Regardless 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 seek advice from the desk above, as the precise proportion of PA vs. NY tax legal responsibility will rely upon the variety of days you labored in every state whereas the choices had been vesting.
Incentive Inventory Choices (ISOs)
ISOs are slightly trickier tax-wise since they are often topic to various kinds of taxation, primarily based on just a few components.
No tax is collected when the choices are granted or after they vest. You don’t owe state revenue tax once you train your ISOs both. Nonetheless, chances are you’ll be required to incorporate the unfold (the distinction between the train value and honest 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 check out the potential state tax legal responsibility primarily based on the actions taken thus far (ISOs have been granted, vested, and exercised however not offered).
State of affairs A: AMT just isn’t triggered.
Whereas AMT is frequent 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 doable, nonetheless, that you just’ll owe federal AMT in your exercised choices.
By way of state AMT legal responsibility, just a few states at the moment implement a state-level AMT:
- California: 7%
- Colorado: 3.47%
- Connecticut: Both 19% of adjusted federal tentative minimal tax or 5.5% of adjusted various minimal taxable revenue, whichever is much less.
- Minnesota: 6.75%
Needless to say every state has its personal thresholds, exemptions, and pointers. Just like the eventualities above, chances are you’ll owe state-level AMT if you happen to transfer to or from a state that imposes AMT in the course of the vesting interval—even when the choices are exercised in a special state. For instance, if you happen to reside 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.
When you reside 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
If you promote exercised choices and earn a revenue, the capital positive aspects shall be topic to tax. Relying on the phrases of the sale, nonetheless, you might be able to get pleasure from extra favorable tax remedy.
Once more, let’s assume you progress from Pennsylvania to New York in the course of the four-year vesting interval. Right here’s how that would impression your state capital positive aspects tax legal responsibility primarily based on the kind of sale.
Certified Sale: When you’ve held your exercised shares no less than two years after your grant date and one yr after you exercised them, it’s thought-about a professional sale. When that’s the case, the earnings are typically taxed on the extra favorable long-term capital positive aspects tax charge.
When your shares are offered in a professional sale, the long-term capital positive aspects 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 standards 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 peculiar and/or capital positive aspects. If this happens, among the revenue could also be taxed primarily based on the proportion of time spent working in every state—much like NQSOs and RSUs, and among the time (the capital positive aspects portion) could possibly 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. In case you have questions on your fairness compensation or different components that would impression your tax invoice within the coming yr, we encourage you to succeed in out to our staff. Ship us a message, or schedule an introductory name with our staff at the moment.