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bged
Returning Member

Apportionment of RSU income under a vesting schedule

I previously lived in one state ("A) and, while living there, began employment with an employer that pays me in part through Restricted Stock Units.  These vest according to a schedule -- for simplicity, call it 25% at the end of year 1, 25% at the end of year 2, through year 4.  I later moved to a different state ("B").  For simplicity, let's say I moved at the end of the first year.

 

My employer proposes to prorate vesting income based on days from grant date to vesting.  For the first year, everyone agrees I lived in state A and the RSU vest is entirely state A income.  What about year 2?  I say I lived entirely in state B, and so I say the second vest is entirely state B income.  In contrast, employer counts the days from grant to vest, and says half those days were state A days, half state B days, so prorates the vest accordingly.  Obviously disadvantageous to me if B has a lower tax rate.  But also seems deeply unfair -- each year's vest covers work done in that year.  (For example, if I took an unpaid leave in a given year, that reduces year vesting in that year but has no effect on any other year.)

 

I found plenty of discussions about similar questions when employees receive stock options.  But the value of a stock option truly relates to the entire period from grant to vest -- based on the volatility throughout the period.  Somewhat different for me -- these are RSUs, with simpler understanding of valuation.  Also the incremental vesting here doesn't seem to be something many states have thought about in their published guidance. 

 

Thoughts welcomed and appreciated!

2 Replies
TomYoung
Level 13

Apportionment of RSU income under a vesting schedule

The use of "State A" and "State B" confuses the situation here because not all states have the same rules when it comes to how compensation income is taxed when RSUs vest.  Here's an article that explains the situation when moving from California:

https://www.upstartwealth.com/blog/will-you-owe-ca-tax-after-you-leave

and the Franchise Tax Board's guidance is discussed here:

https://www.ftb.ca.gov/forms/misc/1004.html#E-Restricted-Stock-

 

Perhaps you can find something similar for your states "A" and "B".

bged
Returning Member

Apportionment of RSU income under a vesting schedule

Tom, thanks for these thoughts. I agree that states' rules vary. My employer is large and has many employees affected, probably as to every state, so I'm trying to get to the bottom of whether the employer's approach is correct. In any event California is a great state to start with.

 

The California FTB guidance is pretty good, in the sense of being easily understood. You will note their overarching principle "you must allocate to California that portion of total compensation reasonably attributed to services performed in this state". That also makes sense. They then go on to describe "one reasonable method" based on time worked -- an Allocation Ratio based on "California workdays from purchase date to vesting date ÷ Total workdays from purchase date to vesting date". Finally, they offer Example 3 to show how to apply this ratio.

 

The problem with the FTB guidance is that, like all the state documents I've looked at to date, it doesn't consider the possibility of a vesting schedule and incremental vesting. In my example, the first year's vest is best understood as compensation for the first year of employment, and the second year's vest is best understood as compensation for the second year of employment. The FTB Allocation Ratio method would incorrectly allocate the second year vest based on the workdays of years one and two collectively, which is contrary to economic substance.

 

I'm still trying to find guidance -- from any state tax authority or any secondary source such as a tax professional's memo or explanation -- of how to handle a vesting schedule with incremental vesting. I'm expecting someone to have the intuition that I have -- for my example, that the second year vest is compensation for the second year of employment activity, and should be allocated based on residence within the second year. To my surprise I haven't yet found anyone saying anything like that -- it's as if all the authorities have overlooked incremental vesting and its implications.

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