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Date:   Thu, 26 Aug 1999
From:   Chris

Mr. Gray:

Thank you for having a web site devoted to stock options.

I have a question regarding "repurchasable" stock options. Say a company issues a restricted stock option, and an employee exercises within 60 days and defers tax obligations until the options actually vest. Then assume the employee's tax jurisdiction changes before the options vest. So... when the options finally do vest, which tax jurisdiction applies? The one in effect at time of exercise, OR the one in effect at time of vesting?

Thanks for your time and consideration of this matter.

Chris

Answer

Date:   Sat, 04 Sep 1999

Hello Chris,

The answer is, probably both.

Since the option was received for services rendered in State 1, the ordinary income will be taxable as wages earned in that state (and subject to employment taxes in State 1.)

Most states tax their residents for income earned from all sources, so the income will also be taxable in State 2.

To mitigate the double tax, a state tax credit should be available. To determine which state tax return to claim the state tax credit on, you have to research the tax rules for the individual states at issue.

Doesn't it make sense for a person in this situation to hire a professional tax return preparer who is familiar with these issues?

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

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.