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Date:  Mon, 15 Mar 2004
From:  Frank

I worked for a Colorado-based, publicly-traded company until October 2001. I relocated to California in January 2002. During my tenure with the company, I received incentive stock options. When I attempted to exercise the options in March 2002, the company refused to allow the exercise. An attorney and many dollars later, the company paid out the options in 2004, and collected state taxes for Colorado. Is this correct? Shouldn't taxes have been collected based on my resident state of California and reflected this way on my W-2?

Answer

Hello Frank,

No. Since you received the options and they vested based on services performed as an employee in Colorado, the income is Colorado-source income, taxable in Colorado. You are also required to report the income on your California income tax return, but you claim a state tax credit for taxes paid with respect to double-taxed income in Colorado.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive 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.