Tax time is fun, except when you owe a bunch of money

One of the least understood areas of taxation seems to be stock options. You can do all the research online you want, but chances are you will find conflicting info and be more confused than when you started. In particular, when multiple states come into play. Here’s a summary of what i know:

 1. Stock option gains are taxed as ordinary income, not capital gains. In fact, for NQSOs, the money is withheld by your employer just like your salary taxes.

 2. People think you only pay taxes in the state where you exercise your options. This is wrong. If you lived in multiple states, each state will tax you based on how long you lived there. So people thinking they can move to Washington and then exercise are out of luck.

 3. Say you held some options for 6 years, lived in California for 3 of those, then New York for 3 of those, and exercised the options in New York for a gain of $10,000. You might think California will tax you on $5000 and New York on $5000. Not true. New York taxes you on the whole amount. Then California will tax you on $5000 and New York will give you a credit for that amount. So if you held options in Washington for years and years, moved to New York and then exercised, you’re screwed. NY will tax the whole amount.

 4. New York City screws you even more. New York state tax is 7%, city tax is another 3%. California tax is 9%. Whatever tax you pay to California gets credited off of your New York State taxes. However, you don’t get a credit on the city taxes. So you might pay California 9% state tax AND New York City another 3%. Brutal. I’m still trying to confirm this.

 Anyone have any info on this? Or other tricks to save money (legally)?

2 comments

  1. Wow..from where i am now (Brunei) , we don’t pay taxes unless you’re registering your company under private limited. After reading the whole entry, i was thinking if one doesn’t have any savings..then you’re screwed big time!

  2. The key to everything is when you exercise. Options exercised and held for > 1 year before sale are taxed at the capital gains rate.For startups that are seriously considering going public, it is important for their CFO to figure out how to allow employees and founders to do 83(b) elections at time of stock option purchase. This minimizes AMT exposure, and the hold date for capital gains is taken to be the date of purchase of the options. Doesn’t help for current taxes, but make sure you’re aware of it for future option grants.

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