NQSO Withheld in 2 States

[KGunnIT]

Hi,

I just file my taxes, but realizing I may have done them incorrectly.

I received some NQSOs a number of years ago while living and working in Colorado. While there, those NQSOs we're vested, but not yet exercised. I since moved to a new state, but continue to work for the same company. I typically just need to file one state tax return (for the state where I now reside).

When I exercised some of those NQSOs, taxes were withheld for 2 states: CO and my current state. When I filed my taxes, I filed in both states. For Colorado, I simply reported the income earned for that state as was on my W2 (thinking that though I haven't lived or worked in that state for years, I was given the NQSO grant while in that state). Now that I've thought about it more, I'm thinking I should have entered $0 for income earned in Colorado and gotten a full refund for the withholding held for the NQSOs that I exercised. Is that correct? Or did I file correctly?

If I did it incorrectly, should I amend my filing to correct the issue? It means a larger return for me, but really just want to make sure it's done correctly and not be audited.

Thanks.

[RobertB4444 · Accepted solution]

The most important question is whether the employer who gave you the NQSOs is a Colorado employer?  Because Colorado taxes Colorado source income so if they are then you did everything just right and you don't need to change a thing.

If they are not a Colorado employer and your NQSOs did not come from a Colorado source then you should re-file and claim zero tax due on zero Colorado income.  (With holding done in error).

[KGunnIT]

They have an office in Colorado, but HQ is in another state.

Will re-filing trigger an alerts (e.g. audtis)? Or no harm in re-filing since it was done in error?

[GeorgeM777]

Yes, you should have filed a return to obtain a refund for the taxes withheld and sent to CO.   And no, it will not trigger an audit merely because you filed an amended CO return to obtain a refund of taxes withheld. 

You don't pay taxes when you receive a NQSO.  Thus, if you were a resident of CO when you received the NQSO, you would not owe any tax to CO based on the receipt of the options.   However, when you exercised your non-qualified stock options and purchased the stock, the difference between the stock price and the strike price of the option is taxed as ordinary income. This income is usually reported on your paystub. 

Upon exercise, you would owe tax to your resident state but no CO because it appears you were no longer a resident there.  Therefore, you may want to file an amended CO return for the year in question to obtain a refund of the taxes withheld.  

@KGunnIT