You left California for Tennessee. Updated your license, registered to vote, the whole thing. Your RSUs vest, and you're thinking: sweet, no state tax on this income.
Not so fast.
California might still want their cut. And they're not alone—New York, Massachusetts, and several other states play by the same rules.
Here's what's happening and how to handle it.
The Rule That Catches Everyone Off Guard
Most states don't tax RSUs based on where you live when they vest. They tax them based on where you worked while earning them.
Think about it from their perspective: RSUs vest over time as compensation for your work. If you worked in California for two years of a four-year vesting schedule, California figures half that income was earned on their soil. They want their share.
Let's say you got a four-year RSU grant worth $400,000 while working in California ($100,000 vesting per year). After year one, you moved to Tennessee and worked remotely. This gives you an idea of how it plays out.
Which States Do This?
The aggressive ones:
- California (very aggressive, well-funded auditors)
- New York (plus they have the "convenience rule" for remote workers)
- Massachusetts, New Jersey, Connecticut, Pennsylvania, Oregon, Illinois, Minnesota, Virginia
The states where this doesn't matter (because they don’t have an income tax): Texas, Florida, Washington, Nevada, Tennessee, South Dakota, Alaska, Wyoming, New Hampshire (which only taxes dividends and interest)
Why This Blindsides People
Your employer probably isn't withholding correctly. Most payroll systems only withhold for your current state. Living in Texas? They withhold zero. They're not tracking where you worked historically.
Many accountants miss it too. Unless they specialize in multi-state taxation and equity comp, they might not even know to look for this.
The bill comes later. California's Franchise Tax Board might not reach out for 2-3 years. Then boom—audit notice demanding back taxes, interest, and penalties.
It feels wrong. You've established residency somewhere new. Shouldn't all future income be taxed there? That's intuitive, but RSUs are compensation for past work, so states look backward.
What to Do About It
Document everything. Keep records of grant dates, vesting schedules, where you lived and worked during the grant-to-vest period, days worked in each state (if you travel), and all related W-2s.
Ask your employer how they're handling this. Call HR or payroll: "How are you sourcing my RSU income for state tax purposes?" If they're not doing it right, you'll need to fix it yourself on your tax return.
File correctly from the start. If you owe taxes to your former state, file a non-resident return and pay it. Yes, it's annoying. But it beats an audit notice three years later with interest and penalties.
Claim tax credits to avoid double taxation. Most states let you claim a credit for taxes paid to other states on the same income. This prevents true double taxation, though it doesn't eliminate the tax.
Time your moves strategically (if you can). Best case: move before receiving new grants. Everything granted after you establish residency in a low-tax state gets allocated there. Worst case: move after grants but before vesting—you'll owe your old state for the time you worked there.
Work with a specialist. Multi-state taxation of equity comp is complex. Find an accountant who specializes in this stuff. The cost is almost always less than the cost of getting it wrong.
The Bigger Picture
Should you skip moving to Texas because California might tax some of your RSUs? Of course not. If the move makes sense for your life, do it.
Just understand the tax implications. Don't assume moving to a no-tax state means zero state tax on all future income.
And remember: the longer you stay in your new state, the better it gets. Future grants are fully allocated to your new state. Your salary gets taxed where you currently live. Capital gains are based on current residency.
The grant-to-vest issue only applies to equity granted before or shortly after your move. Over time, living in a low-tax state becomes increasingly valuable.
Bottom Line
If you've moved from a high-tax state to a low-tax state with unvested RSUs that were granted before the move, assume your former state wants a piece. Document everything, calculate what you owe, and file correctly.
It's annoying to pay taxes to a state you don't live in anymore. But it's way more annoying to get blindsided by an audit years later.
Work with professionals who understand these rules, keep good records, and handle this proactively.
Because your equity compensation should fuel your vision of a life well lived, not cause headaches and tax surprises.
This is educational content, not specific tax or legal advice. Multi-state taxation is complex and depends on your individual situation. Talk to qualified professionals who specialize in multi-state taxation and equity compensation before making decisions.