California Income Tax and Equity Compensation
While equity compensation often drives the question of whether moving from California would be advantageous from a tax perspective, for certain types of equity compensation, becoming a resident of another state may not actually be as helpful as you might imagine.
For restricted stock units (RSUs), California has a formula for determining how much of the income from your RSUs is California income. RSUs, including so-called double-trigger RSUs, are taxed as ordinary income from compensation when they vest. At vesting date, California taxes the portion of the income from RSUs that corresponds to the amount of time you lived in California between the grant date and vesting date.
For example, if you lived in California for two of the three years of a three-year vesting period on your RSUs, then two-thirds of the income from RSU vesting will be California income—even if you live out of state when the RSUs vest.
Non-statutory stock options (NSOs) work in a similar way. You pay taxes on the gain as ordinary income from compensation when you exercise your NSOs. At that point, California taxes the portion of the income corresponding to the amount of time you lived in California between the grant date and exercise date. Later when you sell the stock from the exercise of NSOs when you’re a non-resident, California will not tax the capital gain on any appreciation after the exercise date.
For example, let’s say you lived in California for three of four years between the grant date and the date you exercised your NSOs. You exercised 1,000 NSOs with a $0.50 strike price when the stock price was $20 per share. You will have a California compensation income of ($20.00/share – $0.50/share) x (1,000 shares) x (0.75) = $14,625.
The treatment of incentive stock options (ISOs) is more complex, but possibly more beneficial. Remember, the exercise of ISOs does not create taxable income under the regular income tax rules.
If you exercise your ISOs while you’re in California and plan to hold for the special holding period (two years from date of grant and one year from date of exercise) before selling the stock for long-term capital gains treatment for federal tax purposes, and then move out of the state, California will not tax the subsequent gain on the sale of the stock.
For those living in California with its top tax rate of 14.4% in 2025, leaving California before selling ISO shares may reduce state tax exposure.
If you sell stock less than two years after the date of grant and one year from date of exercise in a so-called disqualifying disposition, the rules work the same as for NSOs. California will tax the portion of the gain for the time from the date of grant to the date of exercise that you lived in California.
For ISOs, there is an alternative minimum tax (AMT) consideration as well that you need to be aware of. When you exercise ISOs, the difference between the exercise price and the strike price is income for AMT purposes.
Since, in our ISO example above, you exercised ISOs while you lived in California, the gain will be alternative minimum taxable income in California, and you will owe tax on that income. You may be able to get some of that tax back through an AMT credit later when you sell the shares. How much AMT credit you may be able to use, if any, depends on the specifics of your tax situation.
Even with a valid change of residency from California, for two of the most common types of equity compensation, RSUs and NSOs, some of your income may still be taxable in California. With ISOs, a residency change may result in different state tax treatment. Even so, you need to be aware of triggering AMT upon exercise of your stock options.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.
Bruce R. Barton
Managing Partner / Financial Advisor
CFP®, CFA®, MBA