You Can’t Just Move to Florida
Georgia Taxation of Stock Options and Deferred Income (Nonqualified Options)
By Mitchell Kopelman, partner-in-charge of Tax, and Jess Johannesen, SALT manager
You were just granted a considerable amount of stock options from your employer, and you think to yourself, “Thank goodness we have a second home in Florida. Once I move down there, I can exercise my options and pay no Georgia state income tax!” Many know the handful of states that do not impose any individual income tax, such as Florida and Texas, but did you know that some states can still tax you as a non-resident after you move? That’s right – if you work in Georgia and receive stock options or deferred income related to your employment in Georgia, you can move to Florida and continue to owe Georgia income tax. Similarly as an employer, if your employees move or retire to different states, you may be liable to withhold taxes on their deferred income when it becomes taxable, even after they move around the country or around the world.
Georgia law provides that, effective Jan. 1, 2011, deferred income, including income from the exercise of stock options, received by non-residents shall be subject to taxation in Georgia under certain circumstances. If the deferred income that a non-resident receives is related to Georgia employment and exceeds the lesser of $5,000 or five percent of the income received from all places during the taxable year, then the taxpayer is considered a taxable non-resident under Georgia law. So what exactly is Georgia taxing when you or your employees move or retire out of the state?
From a federal perspective, there are two general types of stock option plans: statutory and non-statutory. Incentive stock options are one type of statutory stock option, whereby the employee does not have taxable income at the grant date or exercise date. Instead, the employee defers paying federal income tax until they sell the stock itself. Non-statutory stock options do not receive such favorable tax treatment. Depending upon certain factors, income is realized in the year that the options are exercised.
Every time that your stock options vest and you decline to exercise the shares, you have deferred income. Focusing on non-statutory stock options, Georgia uses the ordinary income recognized under federal tax law and calculates an amount related to time worked in Georgia. Whether you are the employee holding the options or the employer granting them, taxable non-residents are required to include this amount on their Georgia income tax returns, while employers are required to remit withholdings on these types of income.
Assume that Danielle is currently a resident of Florida. Danielle was granted 1,000 non-statutory stock options on July 1, 2010. On July 1, 2010, the fair market value and strike price of the options were $35 per share. Danielle was always a Georgia resident until she moved to Florida on June 30, 2011. She worked 250 days in Georgia before she moved: 125 from July 1, 2010 through Dec. 31, 2010, and another 125 from Jan. 1, 2011, through June 30, 2011. After she moved to Florida, Danielle then worked five days in Georgia out of the total 125 days worked for the employer from July 1, 2011 through Dec. 31, 2011. As of Dec. 31, 2011, the options were fully vested, and the fair market value of the shares was $70. Danielle exercised the options and kept the shares. To determine the income to be included in Georgia taxable income:
Ordinary income recognized under federal law:
[FMV $70 less strike price $35 = $35]
$35 per share x 1,000 shares = $35,000
Ratio of Georgia days from grant to vest date:
125 days from 1/1/11 to 6/30/11
Plus 5 days from 7/1/11 to 12/31/11
Over 325 total days worked from grant
date (7/1/10) to vest date (12/31/11) = 40%
Income to be included in Georgia taxable income: $14,000
Notice in the example that, of the 250 days worked in Georgia from July 1, 2010 through June 30, 2011, only 125 of the days worked after Jan. 1, 2011 were factored into the numerator, while the entire 250 days are accounted for in the denominator. Even though Danielle thought she escaped state income taxes by retiring to Florida, her stock options and deferred income require her to file a Georgia tax return and require her employer to withhold tax on her $14,000 of Georgia taxable income.
While the law covered above pertains to Georgia, other states may have contrary views. Georgia calculates the non-statutory stock option income related to Georgia using a date of grant to date of vest allocation method, but other states may legislate that 100% of the deferred income be included for state taxation. Employers should be concerned with reviewing and revising their practices in order to track employees’ business activities (e.g., where services are performed) as well as employees’ residency and changes. Income or withholdings calculated under one state’s rules may not satisfy an employer’s withholding tax duties with other states, and employees may not be aware of non-resident tax return filings for which they are liable.
If you need help navigating the ever-changing landscape of state taxation or have any questions, please contact Mitchell Kopelman (email@example.com) or Jess Johannesen (firstname.lastname@example.org).