stock options exercise after move from CA to OR

[ddsobolev]

If full detailed answer to my question requires me to purchase some special plan in turbotax, please let me know which one so that I will get it.

Given:

• I moved from California to Oregon in October 2020, but stayed with same employer
• My employer uses E-Trade for the stock plan management
• I was granted non-qualified stock options in August 2019 (when I was CA resident), which I exercised and sold in May 2021 (after I became OR resident)
• During exercise, I was taxed by both Oregon (8% tax rate for the whole gain) and California (10.23% tax rate for the pro-rated gain 64%, which is calculated time spent in CA after grant divided by time between grant and exercise). I guess it was done by Stock Plan Administrator from my employer.
• In my 2021 W2, all that gain is included into wages (boxes 1 and 5) as well as box 12 code V. Both Californian and Oregonian taxes are shown in state wages/taxes (sections 15-17).

Questions:

1.

Is it correct that stock plan exercise gain / taxes are included into W2? Do I need to include 1099 from E-trade into tax return form?

I suppose I should include E-trade 1099 (because E-trade is supposed to send 1099 to IRS, so I need to align with it).

But when I include E-trade 1099 into my tax return, my total income includes exercise income twice (one from W2, second from 1099), and Turbotax decides I needs to pay taxes for "second" one.

2.

Why was I taxed 10.23% by California?

I didn't have any other California-taxable income that year. Shouldn't the tax rate depend on tax brackets?

3.

I guess I need to file for "other state tax credit" to get back Californian tax.

Will I get back the whole CA tax, or only some part of it (like the difference between 10.23% as CA rate and 8% as OR rate)?

What exactly should I do in Turbotax in order to submit it properly? (taking into account my question #1)

[DavidD66]

Yes, it is correct that your compensation from the exercise of non-qualified stock options is included in box 1 of your W-2 as wages. 

Yes , you need to report your 1099-B from E-Trade on your tax return.  You will need to adjust the cost basis when you enter your 1099.  Your actual cost basis per share is the value of the stock at the time you exercised the options.  More than likely the stock basis on the 1099 is the option strike price that you paid.  But the difference between what you paid and the value of the stock (the bargain element) was added to your W-2 as income, so your cost basis is the value of the stock when you exercised. 

California considers a portion of your income from the options as having been earned when you were living/working in California.  The options grants were probably awarded while you were in California, so if you leave, they follow you and tax you.

As an Oregon resident, 100% of your income is taxed by Oregon, even the income taxed by California.  However, to prevent double taxation Oregon will give you a credit for the tax you pay to California.  As you suggested, Oregon will only credit you for the amount they tax that income, not the amount you paid to California.

You don't have to do anything special in TurboTax to properly report this.  When you enter the 1099-B from E-Trade, do not import it, enter it yourself.  You will be asked if your sales involve company stock, answer yes and the program will guide you through entering your trades and adjusting your cost basis.

[ddsobolev]

@DavidD66 ,

Thank you very much for the quick and detailed answer.

However, I have one additional question on this paragraph:

---

As an Oregon resident, 100% of your income is taxed by Oregon, even the income taxed by California.  However, to prevent double taxation Oregon will give you a credit for the tax you pay to California.  As you suggested, Oregon will only credit you for the amount they tax that income, not the amount you paid to California.

---

As I understand the rules, it's not Oregon, but California who will give me "other state tax credit".

Here are the links:

Oregon - https://secure.sos.state.or.us/oard/viewSingleRule.action?ruleVrsnRsn=20171

(a) Residents: An Oregon resident is allowed a credit for taxes paid to another state on mutually taxed income if the other state does not allow the credit. 

California - https://www.ftb.ca.gov/forms/2020/2020-540-s-instructions.html

California nonresident individuals, estates, or trusts that are residents of one of the following states or U.S. possessions and paid a net income tax to that state or U.S. possession on income that is also taxed by California may claim the other state tax credit:

Arizona (AZ), Guam (GU), Oregon (OR), and Virginia (VA).

I read it the following way:

• Oregon will allow me tax credit, only if California doesn't allow.
• But because California allows tax credit for Oregonian residents, I should file it in California.

If you agree with my conclusion, can you please help to set the expectations?

1. Can I expect all paid CA tax will be refunded? Or can it be only difference between CA (10.23%) and OR (8%) tax?
2. What exactly should I do in TurboTax in order to claim this credit properly?

p.s. Another question (with both W2 and 1099-B reporting same income) is resolved. Thank you!!

[ddsobolev]

@DavidD66 ,

Can you please help with remaining question from my previous message?

[RobertB4444]

@ddsobolev  The advice that @DavidD66 gave you is almost always correct - you should file your non-resident return first and then claim a credit in your home state for the taxes you paid elsewhere. 

But Oregon is wacky and doesn't allow a credit for taxes paid to Arizona, California, Indiana and Virginia.  So in this case you will file your resident Oregon return and then after it is complete you will file your non-resident California return for the same period and take credit on the California return for taxes paid to Oregon. 

The TurboTax software should walk you through this.

[ddsobolev]

@RobertB4444 ,

My W2 contains following numbers for income (numbers aren't real, but they describe the idea):

• box 1 (wages) - $100k
• box 16 (state wages) - $100k for OR, $20k for CA

What should I enter in TT as "income earned in CA".

I guess it should be $0 (zero), right?

Reason for it: even though W2 shows $20k as CA wage, those $20k are also part of OR $100k.

[MarilynG1]

Yes, if you didn't earn any income in California (or live there in 2021), you would report $0 as CA income and enter the amount of CA tax paid for a credit.

You should ask your  employer for a Corrected W-2 for your records, since what you are reporting does not match the W-2 that the IRS has a copy of.

Click this link for more info on How to Get a Corrected W-2.

[ddsobolev]

@MarilynG1 ,

I didn't live in CA in 2021, and I didn't earn any "regular" wage in CA in 2021 either.

But in 2021 I exercised my stock options which had been granted to me in 2019 when I had been CA resident.

According to this publication https://www.ftb.ca.gov/forms/misc/1004.html  , the part of stock options exercise income is taxable by CA:

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

Hence, my W2 contains in boxes 16-17:

• OR: my whole 2021 income (salary + stock options exercise) with appropriate taxes
• CA: Income taxable by California (according to above formula) with appropriate taxes

As I understand my employer, they have taxed me according to all possible laws, but now it's up to me to avoid double taxation by getting tax credit according to laws of these two particular states.

So, it seems I do have "income taxable by California" - but it shouldn't be eventually taxed, only because OR taxed it too (but if I exercised options as resident of "no-income-tax" WA, CA would eventually tax me).

Now my W2 is the only source of CA taxes for which I want to get credit.

• If W2 is corrected to have 0 (zero) as CA income (box 16) as you say, then what happens with CA tax (box 17)?
• If it becomes 0 (zero) too, then what should I request my credit for?

[MarilynG1]

Based on what you shared, you would have Non-Resident Income to report to California.

In the California interview, you will be able to indicate that only 20K is sourced to CA.  However, CA does tax non-resident income.

Click this link for more info on California Non-Resident Tax.

It still seems like your W-2 is incorrect, though.  If your total income for the year was 100K, then the state income should be broken out in Box 15-17 as 80K to Oregon, and 20K to California, or else Box 1 should be 120K. 

Oregon will tax the 100K in Box 1 (as a Resident), and give you credit for the tax you paid on the 20K to California.

If you have already started state returns, you may want to delete them and prepare your CA Non-Resident return first.

Click this link for more info on How to File a Non-Resident State Return.