Will Moving from California Lower Your Stock Option Taxes?

True Root Financial is a financial advisor and financial planner based in San Francisco, CA. We serve clients across the globe.

If you work in tech in the Bay Area, you’ve likely considered moving to Washington or Texas to sell your stock options without owing state taxes. While it may seem like you’ve found a clever workaround to the California Franchise Tax Board, it’s important to reconsider this approach.

If you are a tech professional interested in learning how we can help claim your financial independence by investing wisely, minimizing taxes and maximizing your equity compensation, please book a no obligation call here.

Explore deeper understanding of the different types of stock options in our in-depth video below:

Key Takeaways:

Moving to a no-tax state can reduce your tax burden but won’t fully avoid California’s taxes if stock options were earned there
Timing of when you exercise or sell your options before or after moving will impact how much California taxes you
ISOs offer more tax flexibility than NSOs when planning a move out of California
Changing residency requires careful planning, execution, and documentation.

How Much Are California Taxes?

California has one of the highest state income tax rates in the country, with a progressive tax system that taxes high earners at steep rates. As of 2024, the highest marginal income tax rate is 12.3% for individuals with income between $698,271 to $1 million. Even for lower income brackets, the state tax rates are considerable:

Source: California Franchise Tax Board

California taxes capital gains at the same rate as ordinary income, unlike the federal system, which offers lower rates for long-term gains. This means all gains from selling stock options are taxed at California’s full income tax rate.

California’s Approach to Taxing Stock Options

California treats stock option income as regular wage income, which means it’s taxed at the state’s marginal income tax rates. The state taxes different types of stock options as follows:

Incentive Stock Options (ISOs): If held for at least one year after exercise and two years after grant, ISOs can qualify for lower long-term capital gains rates but exercising them may still trigger the Alternative Minimum Tax(AMT), including California’s own AMT rules.
Non-Qualified Stock Options (NSOs): When you exercise NSOs, the difference between the exercise price and the fair market value of the stock is considered ordinary income. This income is subject to federal, state, and payroll taxes at the time of exercise.

Moving to Another State: Will It Reduce Taxes?

Relocating to another state with lower or no income taxes might seem like an obvious strategy to reduce your tax burden on stock options. However, it’s not as simple as packing your bags and changing your address. Several factors determine whether you’ll actually lower your taxes by moving:

Where You Move?

Moving to a state with no income tax (e.g., Texas, Florida, Nevada) could eliminate state taxes on stock options, while moving to a lower-tax state (e.g., Oregon, Arizona) might reduce but not fully eliminate your tax burden.

When You Exercise or Sell?

Timing is crucial. Exercising or selling stock options as a California resident makes them taxable, even if you move later. Moving before exercising might help avoid these taxes, but California’s sourcing rules could still apply to income earned while you were a resident.

What Type of Stock Options Do You Hold?

The type of stock options you hold, ISOs or NSOs, affects your tax liability. NSOs trigger higher California taxes if exercised as a resident, while ISOs may qualify for lower long-term capital gains rates if holding requirements are met.

Scenario 1: Exercising NSOs After Moving Out of California

Let’s say you were granted NSOs while working in California and then moved to Texas before exercising them. When you exercise your options with a total gain of $600,000, California could still tax a portion based on the time you lived and worked there relative to the vesting period.

If you spent 80% of the vesting period in California, the state could tax 80% of the $600,000 gain ($480,000), even though you’re now a Texas resident. This significantly reduces the tax benefits of moving.

Scenario 2: Exercising ISOs After Moving Out of California

Let’s say you were granted ISOs while working for a tech company in California and then moved to Nevada before exercising them. If you hold the stock long enough to qualify for long-term capital gains treatment, you may only owe federal taxes on the gains and avoid California taxes altogether assuming you’ve properly severed your residency ties with California. This shows that ISOs can offer more flexibility in reducing California taxes if exercised and sold after moving.

When selling ISOs, you will fall into two buckets: disqualifying disposition or qualifying disposition.

Disqualifying Disposition: Sell within 2 years of grant and 1 year of exercise; California taxes based on the allocation ratio.

Qualifying Disposition: Sell after 2 years of grant and 1 year of exercise; taxed at capital gains rates by your new state.

Scenario 3: Exercising NSOs While Still in California, Then Moving Out

Let’s say you exercised your NSOs while still living in California but didn’t sell the shares until after moving to Florida. Because the exercise took place while you were a California resident, the income from the exercise is subject to California tax, even if you sell the stock after relocating. Any gains from selling the stock in Florida would only be subject to federal taxes, as Florida has no state income tax.

California Residency Rules and Moving

To reduce or avoid California taxes on stock options, you must establish residency in your new state and sever all ties with California, as the state has strict residency rules.

Key Steps to Establish Residency Outside California:

Change your driver’s license to your new state.
Register to vote in your new state.
Move your financial accounts to local branches in the new state.
Sell or rent out any property you own in California, or at least not use it as your primary residence.
Spend the majority of your time in your new state and limit your visits to California.
Change your healthcare providers to those in your new state.

Note📝:California will look at the totality of your circumstances to determine if you have truly moved. If the state decides you’re still a resident, you could continue to owe taxes on stock option income, even if you physically live elsewhere.

Factors to Consider Before Moving

Moving to reduce taxes on stock options involves more than just financial considerations. Before making a decision, it’s essential to weigh all the pros and cons:

Cost of Living: States with no income tax may have a lower overall tax burden but could have a higher cost of living, especially in areas like real estate and healthcare.
Quality of Life: Moving might disrupt your family’s life, career opportunities, and social circles. Consider whether the financial benefits outweigh the personal and professional impact.
Other Taxes: States without income tax may have higher property taxes, sales taxes, or other levies that could offset some of the savings. Evaluate the total tax burden before making a decision.
Future Employment: If you move to another state but continue working for a California-based company, the state might still claim a right to tax a portion of your income, including stock option gains, depending on your work arrangement and the nature of your role.

So, Will Moving Reduce Your Taxes?

The answer to whether moving out of California will reduce your taxes on stock options is: It depends. Moving can potentially lower your tax burden, especially if you go to a state with no income tax. However, California’s complex tax rules, particularly its sourcing rules and residency determination, can complicate things. Proper timing of when you exercise and sell your stock options is crucial, as is ensuring that you fully sever your tax residency ties with California.

Next steps For You:

Before making any decisions, it’s highly recommended to consult with a tax advisor who specializes in stock options and California tax law to develop a strategy that aligns with your financial goals. Book a call below.

Will Moving from California Lower Your Stock Option Taxes?

Key Takeaways:

How Much Are California Taxes?

California’s Approach to Taxing Stock Options