Equity compensation that was granted in non-resident state

[SeePlanet]

Hello,

In 2019 I had equity compensation that was granted while working in STATE A and exercised while working in STATE B. I live in STATE B now. Both states require equity compensation that is earned in more than one state to be allocated amongst the states according to the time spent in each state during the grant to vest period. Currently, my W-2 shows that all of this income was made in STATE B.

Do I need to file state taxes in both STATE A and STATE B? If that is so, do I need to reduce my income when reporting my income on the W-2? Or will filing STATE A automatically adjust that and credit me the tax amount?

[TomD8]

<<I live in STATE B now.>>

More information is needed to answer your questions.

First of all, you need to identify the two states.  That's because some states have reciprocal agreements with each other, which could affect your filing requirements.  Also:

Did you move from State A to State B during 2019?

Did you work in both State A and State B during 2019?

Did you perhaps live in one state all year, but work in the other?

[SeePlanet]

Thanks for the reply Tom.

STATE A = Colorado

STATE B = Ohio

Did you move from State A to State B during 2019? No, I moved in 2018.

Did you work in both State A and State B during 2019? No, just Ohio.

Did you perhaps live in one state all year, but work in the other? I lived in Ohio all of 2019.

Overall, 2019 was entirely in Ohio. Stock was granted to me when in Colorado. 

[TomD8]

Since the amount was reported on your W-2, I'm assuming that you were granted RSU's that vested in 2019.  When RSU's vest, their fair market value as of the vesting date is considered ordinary income and is reported on the employee's W-2.  There usually will be an entry in Box 14 of the W-2 and the letters "RSU" may appear.

Post back if my assumptions are incorrect.

[SeePlanet]

You are right! Box 14 does have the RSU's that vested in 2019. Boxes 15-17 also lists the state wages for Colorado which add up to the RSU's that vested in 2019. 

Given that, has my company already done the math and I do not need to file a state return for Colorado?

[TomD8 · Accepted solution]

OK, I have to revise my previous answer. 

Colorado Regulation 39-22-109 states: 

Income from the exercise of employee stock options is Colorado-source income if such income is treated as compensation for federal tax purposes and to the extent the employee worked in Colorado during the period the employee was required to work for the employer prior to the exercise of the option.

So if your RSU's were entirely earned in CO, the income from their exercise is taxable by CO.  The income would also be taxable by your resident state of OH, since your resident state can tax all your income, regardless of where earned.

Therefore you must file a non-resident CO return reporting the RSU income, in addition to your resident tax return in OH on which you must report all your income. 

You'll be able to take a credit on your OH return for the taxes paid to CO, so you won't be double-taxed.

In TurboTax, prepare the non-resident CO return first, before you do the resident OH return, so that the credit flows properly. 

[SeePlanet]

Box 15 only shows Colorado with box 16 listing the state wages of my RSU grants just for Colorado. 

[TomD8]

See my revised answer above.  

[SeePlanet]

Thank you so much for all of your help!

[yashK]

@TomD8 I am also in same situation. Can you please help me in my situation.

I was granted RSU options in August 2020. I lived in Colorado for past few years and moved to Michigan in June 2021 (before my stock vested in Aug 2021). My employer had shown this vested RSU as normal income and added it in gross income in W2 and withheld the taxes with Michigan state. 

Do I need to pay any RSU related taxes to Colorado in my scenario ?

[DaveF1006]

@yashK  Please read this Turbo Tax link. It states, "when you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock".

Since your RSU vested while you were a Michigan resident, none of that payout is reported to the state of Colorado.

[yashK]

@DaveF1006 Thanks for replying. I read this document 

Colorado Regulation 39-22-109 states: 

Income from the exercise of employee stock options is Colorado-source income if such income is treated as compensation for federal tax purposes and to the extent the employee worked in Colorado during the period the employee was required to work for the employer prior to the exercise of the option.

Do you think it is applicable to me and I have to pay Colorado taxes for RSU since I was in Colorado when my employer granted me stocks 

[DaveF1006]

@yashK  I actually read over Rule 39-22-109 at this link and found some pretty interesting facts. The general rule states that  "a Nonresident who derives income from sources in Colorado and who has Nexus must file a Colorado income tax return and pay Colorado income tax on Colorado net taxable income. Deferred recognition of any income from sources in Colorado remains Colorado-source income when such income is finally recognized".

Based on this, my opinion is since the stock option was granted in Colorado, then it is Colorado sourced income.  Further more, there was deferred recognition of income when the options were exercised but according to this rule, it still remains Colorado-Source income and I would report it as such.

Thank you for making me aware of this document.

[yashK]

@DaveF1006 DO you think the status of my employer matters. Though I was granted RSUs in Colorado, my employer is an MNC. Its headquarter is in California and in my W2 the employers address is always California, It does not have an office location in Michigan but it should have nexus in Michigan because there are many other employers in Michigan working remotely. 

[SeePlanet]

This is how I have been dealing with it the last couple of years. Each year, my employer sends me a summary of the RSU's that have vested. Even though I have not chosen to sell the subsequent stock, it's my understanding that there is still income to account for in the previous state.