Relocating to Minimize State Income Tax on RSUs or Stock Options? Here is What You Should Know

You have worked hard to earn a meaningful equity payout – whether through Restricted Stock Units (RSUs) or a cashless stock option exercise. If you are considering moving to a state with no income tax, such as Florida or New Hampshire, in hopes of keeping more of what you’ve earned, there is an important nuance to consider: your former state may still lay claim to a portion of that income.

The Tax Trap Behind the Timing

Consider this common scenario: After years of living and working in a state like California, New York, or Massachusetts, you decide to relocate just before your equity vests or a liquidity event occurs. You update your driver’s license, establish residency in your new state, and prepare to celebrate your move – and your windfall. But then, a surprise: your former state asserts that much of the income was “earned” during your years of residency and should be taxed accordingly.

Why the Move Doesn’t Always Mean Tax-Free

Many states with income tax apply sourcing rules that tie equity compensation to the period over which it was earned – not simply where you live when it pays out.

For example:

• You live in a high-tax state for four years while your RSUs vest or your options accrue.
• In the fifth year, just before a major payout, you move to a no-tax state.
• Your former state may still tax a pro-rata portion of your income – 80% in this case – because it was earned while you lived and worked there.

This means you could be required to file a non-resident tax return in your former state and potentially owe a significant tax bill – even if you've already changed your residency.

A Real-World Example

Let’s say your RSUs vest as a result of a company acquisition, and you’re set to receive $750,000. If you lived in a high-tax state for four out of the five years leading up to the event, that state may tax 80% of the payout, or $600,000. At a 10% income tax rate, that’s a $60,000 bill – despite your new tax-free address.

Why Expert Guidance Matters

Strategic tax planning becomes essential when stock compensation is involved – especially if you're contemplating a move. Equity income straddles multiple tax jurisdictions, each with its own rules around sourcing and allocation. A qualified tax advisor, in partnership with your financial advisor, can help you understand how different states treat RSUs and stock options, and whether your move truly reduces your liability.

Some states apply a strict allocation formula; others may tax 100% of the income if earned during your residency. Understanding these distinctions before you move can make all the difference.

Considering Puerto Rico?

For those eyeing Puerto Rico as a tax-friendly alternative, keep in mind that while Puerto Rico operates under a separate tax system, certain federal tax obligations may still apply – particularly for U.S. citizens. Special incentives exist, but the rules are complex, and the benefits depend heavily on timing, structure, and continued compliance.

Final Thoughts

The appeal of relocating to reduce your state tax burden is understandable – especially in light of a meaningful equity event. But timing, sourcing rules, and state-specific laws can introduce unexpected complications. Before making any major decisions, ensure you have a coordinated plan in place. With thoughtful guidance, you can sidestep costly surprises and retain more of the wealth you have worked hard to build.