You Can Take an RSU Out of California, But You Can't Take the California Out of the RSU

Key terms before we begin

Grant date

The day your employer promises you the shares. Nothing is yours yet, and nothing is taxed yet.

Vesting date

The day the shares actually become yours. This is the day they get taxed, on whatever they are worth that morning.

Tranche

One slice of a grant. A four-year grant usually vests in four annual tranches, or sixteen quarterly ones. Each tranche has its own vesting date.

Workday

A day you performed work, and the state you performed it in. Not a day you lived somewhere. That distinction is the whole article.

Ordinary income

Income taxed at your regular rates, the same as your salary. Not a capital gain.

Say you moved out of California for over a year now, the Bay Area blues have been replaced with the Dallas delights! (don't hold me to these geographic emotions) You think you're in the clear from the golden state tax man but lo and behold, like Michael Corleone in the Godfather, you're back in.

See, CA has an allocation test that it uses to allocate how much of your vested RSUs are taxable for the state. So, if you worked inside California for a company, and then moved out of state and continued vesting RSUs, those vested interests will be taxable for California. Even if you're living in Dallas, Texas.

California does not tax your RSUs based on where you live when they vest. It taxes them based on where you were working while you earned them.

Why California gets to do this at all

RSUs are not an investment, they are compensation for services. Just like your salary, and §83 treats them that way at the federal level. (For a primer on the federal mechanics, read how RSUs are taxed.) Likewise, California taxes compensation for services performed in California. It just feels so wrong since the gap between doing the work and getting paid for it is essentially years instead of bi-weekly, like your pay stub.

So, the vesting date is when the income is measured. It is not when the income was earned. Those are two different dates, and California cares about the second one.

Allocating California

The Allocation Ratio

California calculates your RSU income by workdays. Start with the total workdays you had in the state of California between grant and vest vs Those that were outside of California. That ratio is how it's allocated. Count how many of those you spent working in California. That fraction of the vesting value is California income.

Ex. You are granted 4,000 RSUs on March 1st, 2023, vesting over four years. You work in San Francisco until June 30th, 2025, then move to Dallas and kept working for the same employer.

A tranche or set of 1,000 shares is due to vest on March 1st, 2026 at $80 a share, for a total of $80,000 counted as ordinary income. Of the three years between grant and vest, roughly two years and four months (28 months out of 36 months) were California workdays, which is about 78 percent. So, from your $80,000 in ordinary income, $62,400 of your total income is allocated to California (.78 x 80,000 = 62,400). The remaining $17,600 would be counted towards Texas income.

So, despite living in Texas when those shares vested California still took the larger share because a larger share of the work happened there.

Say you moved to California halfway through

The same rule applies; the direction differs. You'll essentially go from having little CA income to soon having a larger share as your California workdays get bigger.

If This Is You

Don't fret. There are experts who do this sort of thing for a living. We might know a few, feel free to ask!

This post is general information about how California sources RSU income. It is not tax advice, it does not account for your own facts, and reading it does not make you a client of Red White & Blue Tax Services. Figures in the example are illustrative. Rates and thresholds change. Advertising material.