Which tax jurisdiction applies? The one in effect at time of exercise, or the one in effect at time of vesting?
September 4, 1999
Date: Thu, 26 Aug 1999
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.
Date: Sat, 04 Sep 1999
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?