RSU Treatment by California

[sa_garg]

I worked in India. There I got some RSUs (Restricted Stock Units). I moved to USA on L1. In USA, some of those RSU got matured. 

Question 1: Can I source a part of the RSU gain to India, according to my stay in company there, for California tax purposes and adjust from my California income?

Question 2: I think, I can source a part of the RSU gain for Federal tax purposes and take the adjustment. Please confirm

[GeorgeM777]

We need some additional information.  What is your residency and work status?  For example, are you a U.S. citizen?  Resident Alien? Do you have a green card?  The responses that follow may need to change based on the additional information you provide.

Question 1:  Probably.  Your RSUs will generally be subject to tax based on the the rules of the country in which the income was earned.  If the income you earned in India can be attributable to RSUs, then you probably will be subject to the applicable tax rate in India.  If you have paid a foreign tax to India, then you could seek a credit for paying that tax on your California return and your federal return.

Question 2:  When did your RSUs vest and and in what country were you working when the RSUs vested?  If you sold your RSUs, when did you sell them and in what country were you working when you sold them?

@sa_garg

[sa_garg]

I am an Indian Citizen. I do not have green card. I moved to California USA on L1 in September 2021. I left my company and left USA in November 2022. Through out this period, I stayed in California. In year 2021, I filed 1040NR for federal and 540 NR (part year resident) for California taxation.

I was given RSUs when I was working in India. Based on their vesting cycle, some of them got vested during year 2022 when I was in California (USA).  On the day of vesting, those RSUs are transferred in my share account. The complete gain corresponding to vesting has been added in my W2 (box 1 and box 16) and also shown separately in box 14.

For the duration, when I was with my company in India (before September 2021), I am subtracting/adjusting the vesting gain on my federal return and paying taxes in India for the duration attributed to India. E.g., If total hold period from grant date to vesting date is 1 year, and I spent 3 months in India out of that, I am attributing/sourcing 25% to India, paying taxes in India and for the remaining 75%, I am paying federal tax.

Now Question comes, for this vesting gain, can I adjust the vesting gain from California taxable Income shown in box 16? something similar to what I am doing with federal earning.

I sold RSUs to cover taxes associated with vesting.  I am handling that as vanilla stock sell - purchase using 1099-B. Sell purchase is occurring within a span of two days. 

[ErnieS0]

Yes. You can do a similar allocation for California income tax purposes.

California says:

If you are a nonresident of California on the date the stock vests, the character of the income attributable to the vesting is compensation for services rendered. California will tax the income to the extent you performed services in this state.

All Service Performed Within California

If you perform services for a corporation entirely within California but the stock vests after you terminate employment and become a nonresident, the income attributable to the difference between the fair market value of the stock on the vesting date and the price you paid for the stock has a source in California, the location where you performed the services.

Example 2

On February 1, 2011, while a California resident, you purchase stock from your employer that was subject to substantial risk of forfeiture for a 3 year period. You performed all of your services in California from February 1, 2011, to December 31, 2013, the date you left the company and permanently moved to Wyoming. On February 1, 2014, your stock vested.

Determination:

The difference between the fair market value of the stock on February 1, 2014, and the price you paid for the restricted stock on February 1, 2011, is characterized as compensation for services having a source in California, the state where you performed all of your services.

Equity-Based Compensation Guidelines

[sa_garg]

Thanks Ernie for your response. 

My situation is different. I was given RSUs when I was in a foreign country (India). It was before I came to California. They got vested when I was working in California

Now, the question is can I offset RSU gain for the period I worked in India, prior to moving to California?

[ErnieS0]

Yes, you can offset the gain for the period you worked in India.

If you performed services for the corporation both within and outside California, you must allocate to California that portion of total compensation reasonably attributed to services performed in this state. (California Code of Regulations, Title 18, Section 17951-5(b))

One reasonable method is an allocation based on the time worked. The period of time you performed services includes the total amount of time from the grant date to the exercise date (or the date your employment ended, if earlier).

The allocation ratio is:

California workdays from grant date to exercise date ÷ Total workdays from grant date to exercise date.

Income taxable by California = Total stock option income × allocation ratio

Example 3

On July 1, 2009, while a resident of Texas, your company grants you nonstatutory stock options. On July 1, 2010, your company permanently transfers you to California. On July 1, 2013, you leave the company and permanently move to Florida. From July 1, 2009 through July 1, 2013, you worked for the company a total of 700 days in California and 300 days in other states. On August 1, 2013, you exercise your options.

Determination:

The difference between the fair market value of your shares on August 1, 2013, and the option price is stock option income characterized as compensation for services. The total workdays from grant date to exercise date equal 1000 workdays (700 California workdays + 300 other state workdays). Your allocation ratio is .70 (700 California workdays ÷ 1000 total workdays). Therefore, California will tax 70 percent of your total stock option income.

Equity-Based Compensation Guidelines