How to make TurboTax correctly treat nonresident RSU income for CA?

[Jeremy-Salmon]

My employer issued RSUs, some of which had an award date when I lived in CA and a vest date when I lived in OR. The employer correctly calculated the amount to withhold for CA taxes at vesting date based on the dates I lived in CA vs when I lived in OR, and reported it on my W2 as regular income for CA wages.

In TurboTax, I entered the information, along with my residency status (CA non-resident, did not live in CA for any of 2022). TurboTax seems to have inferred that all of the tax paid to CA is invalid and issued me a 100% refund, when in fact it is correct (see the RSU section of https://www.ftb.ca.gov/forms/misc/1004.html, pasted below)

Restricted stock unit (RSU): If you are a California nonresident, on the vesting date:
California will tax the wage income to the extent services were performed in California from the grant date to the vesting date.

I believe the refund should be much closer to zero (if not exactly zero). Where do I tell TurboTax that these wages were correctly withheld even though I did not live in CA at all during 2022?

Adding a few more details:

What TurboTax seems to have done is mark the income tax paid to CA as subject to CA tax credit 187 (see https://www.ftb.ca.gov/forms/2022/2022-540-s-instructions.html) which states 

> Generally, residents of California may claim a credit only if the income taxed by the other state has a source within the other state under California law.

According to the rules for RSUs, these wages have a source of CA and cannot be counted toward this credit. This seems like a bug in TuroTax (or at least, it seems I cannot override this manually).

[GeorgeM777]

How did you determine what amount of the RSU compensation to allocate to California?  You are correct in that at vesting date, CA taxes the portion of the income from RSUs that corresponds to the amount of time you lived in CA between the grant date and vesting date.  For example, if you lived in CA for one of the three years of a three-year vesting period on your RSUs, then one-third of the income from RSU vesting will be CA income and subject to CA tax.  CA applies this tax to your RSUs even if you live out of state when the RSUs vest as happened in your case now that you live in Oregon.

You are also correct in that you should not be getting a CA resident tax credit.  OR may give you a credit for the tax you pay to CA assuming OR seeks to tax the same income.  Regarding tax credits--and you may have already done this--you need to complete your non-resident tax return first and then move to your resident return.  Right now, it appears you owe nothing to CA and given how CA taxes RSUs, you must have some tax liability to CA.  Thus, we expect the issue could be in the way you allocated your RSU income to CA.  

@Jeremy-Salmon 

[danielod]

Hi Jeremy 

Did you figure out how to correctly report the amount of RSU withholding that should not be refunded from California?  I have a similar issues (as does a colleague).  We moved from CA to a non-tax states (FL and TX) but when filling out the non-residency return for California, we are basically receiving a refund for 100% of taxes paid in CA.  To your point, we think the amount withheld for RSUs should not be refunded. 

I'll have to submit an amendment to my return, but I'm not sure how to correct this in turbotax, and GeorgeM777 answer to your question does not seem to help. 

Thanks,

[Jeremy-Salmon · Accepted solution]

Hi there @danielod ,

Yes I ended up figuring out the problem. CA has a double taxation law that says you get a refund for any income that is also taxed by another state. In this case, TurboTax interpreted the RSU income as double-taxed by OR, which it was, but the law mentioned in the original question overrides this double-taxation exemption (because the double-taxation exemption doesn't apply to any income whose "source" was CA, and this RSU stuff has that classification).

I figured this out by printing out the final tax form (what is sent to the IRS) and going through it until I spotted the unusually large deduction, and looked up the deduction code to figure out it was the double taxation thing.

From there, I filed an amendment through TurboTax by finding the part of the UI in which I could override the amount of income that was double taxed by each state, which was under special deductions. It took me forever to find because I kept looking around in the income section.