As others have said, the bonus is US source income and subject to US tax regardless of your residence at the time you receive it. The same is true for U.S. state income tax purposes. If you performed the services to earn the bonus in a US state that imposes an individual income tax, the bonus has its source in that state and will be subject to state income tax there regardless of your residence at the time you receive it. This is an item of income that is not protected from source taxation by US federal law.
My knowledge of French Taxation is limited to correctly spelling Fench (sic) and Taxation. But I suspect he may have legally avoid paying them by having his income deposited in a bank account that was not in France. That nuance will need to be explained by someone else.
Katie, I really do know better than to disagree with you, but I have to do so.
IIRC it was Willie and the Supremes who ruled that pensions accumulated in one State, but received in another are sourced in the receiving State.
Consider an employee Mary who works for XYZ Corp in Michigan and is transferred to an XYZ subsidiary in Texas as of 1/1/2009. Her 2008 bonus is paid to her in Texas on 2/2/2009. If I were a betting man (which I am), my money is on her 2009 bonus being Texas sourced 2009 income.
I await your cite to once again prove you are right. ;)
No, it wasn't Willie and the Supremes, it was Congress. The law you are thinking of is HR 394 (4 USC Sec. 114), which prohibits states from taxing CERTAIN KINDS of retirement income of nonresidents on a source basis. This bonus is NOT one of the types of income that are listed in the federal statute. Another example of an unprotected deferred compensation item is the bargain element of an NQSO or an ISO with a disqualifying disposition. States may, and do, tax that income to nonresidents on a source basis.
These are the kinds of income that are protected by HR 394:
(a) Payments (including lump sum distributions) from qualified retirement plans, such as IRC § 401 plans, § 403(b) annuities, IRAs, §457 plans, government and military plans, and §501(c)(18) trusts.
(b) Payments from nonqualified plans receivable in a series of substantially equal payments, not less frequently than annually, over the recipient?s life or joint life expectancy or over a period of not less than 10 years.
(c) Any payment from a nonqualified plan established to provide highly compensated employees with benefits not available from a qualified plan due to ERISA restrictions, and received after termination of employment.
In addition, P.L. 109-264, signed by the President on August 3, 2006, amends 4 U.S.C. § 114 to add payments to nonresident retired partners to the list of retirement income items that states are barred from taxing on a source basis. The law prohibits states from taxing retirement income paid by a partnership to a nonresident retired partner under any written plan, program or arrangement that was in effect immediately before the partner retired.
As you can see, this deferred bonus does not fit into any of the protected categories. Therefore it is taxable by the state where the services were performed regardless of the residence of the taxpayer when the income is received.
As for Hypothetical Mary, her bonus is clearly taxable in Michigan on a source basis to the extent it arose from services she performed in Michigan, so you lose your money (and she loses hers ). If Texas imposed an income tax, it would be taxed in Texas too. One state would probably allow credit for the tax paid to the other.
So if shares are granted in California and they vest while in California, and you move to Texas, do you owe California tax on the profits? And if the shares are granted in California and vest in Texas after you move to Texas, and you exercise in Texas also, do you still owe California tax?
For California specifically, see FTB Technical Advice Memo 2001-0463
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There is some variation among states on this, but in general, the source of income from the exercise of an NQSO, or the exercise of an ISO that is disposed of in a disqualifying disposition, is the place where the taxpayer performed the services to earn the option. This income is generally reported on a W-2. Unless the option plan specifies otherwise, the income is considered to have been earned during the period from the date of grant to the earlier of the date of exercise or the date of separation from the employer's service. Some states, e.g. New York, consider the earning period to end at the date of vesting. If an individual performed services in more than one state during the earning period, the income is prorated by the days to determine its source.
There is also variation among the states in the treatment of the capital gain from an ISO when the option is exercised and the stock is sold in a qualifying disposition. In that case there is no ordinary income recognition at the date of exercise (except for AMT purposes), and the difference between the option price and the sale price is all capital gain. California treats the entire gain as income from an intangible asset, sourced at the residence of the owner of the asset; therefore stock acquired by the exercise of an ISO and sold in a qualifying disposition would not create California source income if the taxpayer was a nonresident at the date of sale. On the other hand, New York considers the gain to the extent of the excess of the fair market value of the stock at the date of exercise and the option price to be compensation for services, even though it is capital gain and not ordinary income, and prorates it in the same way as the bargain element of an NQSO. Any excess gain is sourced at the residence of the taxpayer. See New York Technical Service Bureau Memorandum TSB-M-07(7)I, 10/04/2007.
To modify your example slightly, for California purposes, if a taxpayer was granted an NQSO or ISO while employed in California, or became employed in California subsequent to the grant date and worked for the employer in California for some time, and then moved to Texas and exercised the option (and, if ISO, disposed of the stock in a disqualifying disposition), the taxpayer would owe California tax on the bargain element (FMV at date of exercise minus option price) to the extent of the proportion of days worked in California to total days worked for the employer from the grant date to the earlier of the date of exercise or the date of separation from the employer's service. For California the vesting date is not significant.
I'll just note that the above memo pre-dates that IRS's 2004 "final ruling" on ISO's, which changed the time at which income might be recognized on options, and which led to a large decline in employer use of ISO's relative to stock grants, founder's stock, and similar non-option compensation. The above FTB memo only applies to options, not grants.
This date of grant and prorated stuff does not make total sense to me. Say you were granted options while working in CA, and 20% vest each year, and after 2 years you move to TX, and you exercise all options at the 5 year mark. Then 2/5 or 40% of your stock option income is CA source. However, if before leaving CA, that is at the two year mark, you exercise all your vested options you pay CA tax on all of it. When you later exercise the remaining shares in TX, is 40% of your profits on these remaining shares still considered CA income?
With numbers, say there are 5 shares in the grant, strike price $100, after 2 years stock is $300, after 5 years it is still $300. If exercise all shares in TX at 5 year mark, profit is x=5*$200=$1000, and CA portion is x*0.4=$400. If you exercise all vested shares in CA before leaving, then profit is x=2*$200=$400 and all of it is subject to CA tax. But at 5 years you exercise the remaining 3 shares, and profits are y=3*$200=$600. If 40% of this is subject to tax, then it means in net $400+$600*0.4=$640 of your stock option income is subject to CA tax.
Well, whatever you exercised as a California resident would be subject to California tax on a residence rather than a source basis. All of the gain on the first 2 shares is taxable on a residence basis, regardless of its source. The only part that was exercised as a nonresident was the last 3 shares, which were earned by the performance of services over the 5 years, 2 of which were in California. So 40% of the bargain element is California source income. Yes, you would pay California tax on more of the income than if you had waited to exercise all of the options after the move, but that's just the way the system works: residents are taxable on all income; nonresidents are taxable on source income. Good tax advice and a good crystal ball are good things to have .
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