NY Underpayment Penalty for 2022—CA Resident, RSUs Vesting in CA, Need Advice!

[douglasjia]

Hi everyone,

I’m hoping to get some insight—here’s my situation:

• Residency & Income
  I was a full‑year California resident in 2022.
  I had NY‑source income because some RSUs were granted while I worked in NY, but they vested while I lived in CA.

• Taxes Paid

  • Prepaid NY estimated/withheld: $12,546

  • Prepaid CA state tax: $20,504

• 2022 Tax Filings

  • NY non-resident return: allocated all W‑2 income to NY, claimed credit for CA tax

  • CA return: claimed credit for taxes paid to NY

  • Paid NY: ~$11,116

  • CA refund: ~$16,005

• NY Penalty Notice
  On July 22, 2025, I received a notice stating I owe a penalty on the NY underpayment based on a 5.727% rate because my total NY tax liability ($21,295; calculated based on the safe‑harbor exceptions) exceeded my NY prepayment ($12,546).

• Questions I Have

  1. Does NY just look at NY payments versus NY liability, regardless of CA credits?

  2. Can I request a waiver if the underpayment resulted from following my CPA’s advice?

[NCperson]

@douglasjia 

<<Does NY just look at NY payments versus NY liability, regardless of CA credits?>>

That is correct. But you are confusing the credits; it has nothing to do with the situation.

NY determined the tax based on NY sourced income.  It did not consider any of the money you earned in CA (other than the RSUs) 

CA determined the tax based on ALL your income regardless of where it was earned.  THEN it gave you a credit for taxes paid to NY.  

What NY is stating is that you should have had more money withheld during the year payable to NY (or made estimated payments).

Since that didn't occur, they are charging you for underpayment.  On the other side, CA doesn't pay you interest for over-paying the tax. 

You might contact NY and see if they permit one-time waivers.

[douglasjia]

Actually, only about 1/3 of my w2 income is earned in NY (The RSUs granted while I was in NY but vested when I was in California). The base salary and bonus are earned in CA. But in W2, both NY and CA treat all my income as subject to their state tax which shouldn't be the case.

When I filed my tax with turbotax in the past by myself, I usually split the income into NY and CA so that the tax withhold for NY won't incur penalty. But for the year 2022, the CPA told me it's better to allocate all my income to NY to minimize audit risk...that's why I got the penalty (which I didn't receive any warning from the CPA).

In this case, do I really owe NY tax? From my perspective, it's just a difference on the way of splitting my income between NY and CA. 

Should the CPA be responsible for this penalty as they didn't warn me about this penalty? If they warn me this penalty, I'll insist on allocating only the amount I earned in NY to NY tax return.

[NCperson]

@douglasjia  RSU that were granted in NY are taxable to NY, even if you live elsewhere when they vest.....that is NY law. 

if you look closely at your CA tax return, you get a  credit for taxes paid to NY so that you are not taxed twice on the same dollar of income.  Review Schedule S on your CA tax return (which I suspect flows to Line 43 or 44 on the CA tax return).  If you do not have a credit on these lines, talk to your accountant.  

You are required to pay tax to NY on monies earned there.  Similar case in CA.  You can't just say, hey, I'll just pay it all to CA as it's the same to me.  Each state has its own requirements. 

On the penalty, you are responsible for the tax return.  You signed it, right?  Suggest discussing with the accountant (or get a new one!)

[douglasjia]

Sorry, you may missunderstand my previous comment. I mean, for example, I earned 300K in total in that year. 100K is from NY (for the RSUs granted there); the other 200K is the base salary and bonus I earned while I live and work in California. My tax withhold for NY is based on 100K; and for CA is based on the total 300K. If my accountant report my tax as 100K to NY and 200K to CA, I won't have the penalty from NY. The issue is, my accountant allocated all 300K to NY. I know I am not double taxed. But their strategy lead to under pre-payment of tax to New York State.

If I were notified this penalty while they are preparing the tax return, I would insist on only allocating the partition I earned in NY to NY. But they didn't tell me anything about the penalty. Now, after two years, NY state told me I have the penalty. My argument is, as a tax professional, they should have warned me the penalty when they used this strategy to file tax return. This should be their negligence. 

For tax professionals in this forum, do you think it is your duty to tell your customer that the strategy you used will lead to a penalty?

[NCperson]

@douglasjia there is a broader issue here.   You also have a problem with CA.  Your tax accountant did you no favors by reporting all the income to NY if $200k was earned while you were living in CA. 

If  tax rates are higher in CA than NY,  he was 'saving' you money by reporting everything to NY and not correctly reporting to CA.  

<< If my accountant report my tax as 100K to NY and 200K to CA, I won't have the penalty from NY. >>

if that would have occured you would have owed CA the tax on the $200k, but would have owed A LOT less to NY.  

are you missing the larger issue? it's not the penalty that would be my issue.  It would be not reporting earned income to CA; that is fraud.  I'd ask under what "strategy" did they rationalize not reporting income earned while a resident to CA to CA? 

[douglasjia]

No fraud at all here. I earned 300K. These 300K were reported to both NY and CA. NY withhold tax only on $100K; CA withhold tax on all 300K. If my accountant split my income as is (100K to NY and 200K to CA), I would have no penalty from both state and get a small refund from CA; now, my accountant split all my income to NY, I became haven't withhold enough money for NY and get a large refund from CA. This resulted in the penalty from NY.

So, the accountants income split strategy lead to this penalty. Also, they didn't warn me this penalty in 2022 which I believe is their negligence. If they warn me this will incur a penalty from NY, I'll insist on split my income as is (100K to NY and 200K to CA).

[douglasjia]

Actually, I asked my accountant on if it's allowed to allocate all my income to NY while part of my income is earned in CA. Here is what I asked them:
It is  a NY state requirement for employers to report all Box 1 wages to NYS. But we should allocate my husband's income when filing the state taxes. If we do not allocate the income based on reality, is this correct & allowed? 

Here is their response: Yes this is the most conservative approach.

[NCperson]

@douglasjia suggest you seek another local accountant who can review your tax return.  You may be misunderstanding what the current accountant is stating.

While ALL income is reported on the NYS tax return, it is reconciled to display ALL the income versus just the NY earned income.  So not sure if you are misunderstanding what your tax pro is stating or he is fraudulently reporting your tax return,

From your example, the tax on $100,000 of income should have been paid to NY and tax on $200,000 of income should have been paid to CA.  You lived and worked in CA when you (or your spouse) earned that $200,000 and the tax is due to CA. 

It could be conservative to pay everything to NY, because on the whole, the tax rate may be lower and it would save you on state income tax, but it would not be a legal way to do it. 

here is the form.  Look at LINE 1 - it displays BOTH the TOTAL federal income and the NY STATE income. But when you get to Line 45 it divides the NYS income by the federal income to determine the tax to be paid to NY.  The percentage on line 45 should be around 33%.  If so, then you only paid tax on the $100,000 of income.   if the percentage is around 100%, then something is definately incorrect.   Suggest looking at your tax return. 

https://www.tax.ny.gov/pdf/current_forms/it/it203_fill_in.pdf