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Subject:   California rules for taxes stock options
Date:   Fri, 03 Oct 2003
From:   Chris

Can California's rule about taxing options both on "moving into" and "moving out" of the state be challenged successfully? I must admit to a significant amount of ignorance regarding taxing on the income source. I'm now faced with a huge tax bill from California three years after an exercise. The source of the options was California and the residency when exercised was Colorado (where I paid full taxes on the gain.)

Thanks for your help on this matter. Your web site is very good.

Chris

Answer

Date:   Fri, 03 Oct 2003

Hello Chris,

California's rules are actually similar to the various states. You should consult with a tax attorney, but I think it's unlikely you will succeed in challenging California on this issue. There is a long history of court cases favoring the government on this issue. Depending on your facts, you might be able to establish that some or all of the income was earned outside of California, such as if you worked outside of California as the options vested.

You might be able to qualify for a state tax credit for the California tax as a reduction of your Colorado tax, but you should file an amended Colorado return immediately because the statute of limitations for amending your Colorado income tax return might be coming up. (I hope it hasn't passed.)

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.