Relocate to a Lower Taxation State

Relocating to a state with no/low income tax rates allows you to avoid high state tax rates on stock sales and stock comp income.

Strategy Overview

One tax strategy individuals with significant stock and/or equity compensation holdings may consider is relocating to a lower-tax state. Many states have much lower (or no) tax rates compared to high-tax states like California and New York. Relocating your primary residence to one of these low/no income tax states can result in substantial state tax savings, for (1) sales of appreciated stock, and (2) income tax on vesting/exercised stock-comp.

Tax Details

Some states like California and New York have high income tax rates, up to 13.3% at the top brackets. Meanwhile, states like Texas, Florida, Washington and others levy no state income or capital gains tax at all. However, the way taxation works differs between owned stock/equity and types of stock-based-compensation.

Owned equity/stock is considered "property", and you can take it with you across state lines without tax implications. Taxable events for property occur when a transaction occurs --> so the tax treatment you'll have (if any) is based on your state of residence when you sell shares (and where you lived when purchased the shares doesn't matter). So if you move from a high-tax state (e.g. California) to a low- or no-tax state (e.g. Texas), you can fully avoid state taxes on stock sales that occur after you have relocated (to Texas).

For equity compensation, state tax treatment is a more nuanced. Equity compensation is considered "income", and as such, nearly all states have pro-rata rules that split income between states (predominately based on the number of days you resided in each state and "earned" into the equity comp). The percentages applied can depend on the stock comp type/structure, date of residence, vesting dates, and more --> and is outside the scope of this knowledge base to opine on. If you'd like to dig deeper on the most popular state's rules for this (California), you can read more on this California Franchise Tax Board webpage.

The key is establishing residency in the new state before the tax-triggering event. This may require meeting certain thresholds in terms of days spent in the new state, transferring driver's licenses and voter registration, etc. Failure to complete any of these requirements can result in excess taxes or a state claiming that you didn't intend to permanently relocate (and thus you still owe taxes to your prior state).

Key Benefits

• Ability to avoid paying state tax on capital gains post-relocation. Equity/stock is property, and taxation is based on your state of primary residence at the time of stock sale.

• Avoid high-income tax rates. Income on stock-comp can be reduced by relocating to a low/no tax state. But be aware that if you worked in a state with taxation for some period of the vesting, you will very likely have pro-rata treatment on the income (if any) you realize in the future when the option is exercised or the double-trigger RSU vests.

Key Considerations/Flags

• Must establish residency. You need to make sure that you take all appropriate steps regarding relocation. Update your address, automobile registrations, drivers licenses, etc.

• Moving away from a state and then moving back within a few years can create issues. High-tax states may consider a move like this as "not intending to permanently relocate" and seek to collect taxes on the time you were not a resident.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• You live in a high-income tax state (e.g. California or New York).

• You expect to realize a large capital gain soon (e.g. an IPO or acquisition is going to occur and you plan to sell some/all of your holdings).

• Your anticipated income (salary and stock comp) is large.

• You desire to relocate to a new state or you don't dislike the idea of relocating and the tax savings are "worth it" to do so.

🔴 When to Not Use This Strategy:

• You live in a low- or no-income-tax state already.

• You don't desire to relocate (tax optimization is helpful, but relocating is a large life change).

🟡 Consider on a Case By Case Basis:

• You're uncertain if/when a liquidity event (which will result in a large capital gain for you) will occur.

Example