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State conforms to federal law in treatment of stock options Inside...

California conforms to federal law concerning taxation of nonqualified stock options (NQSOs) and incentive stock options (ISOs). In this article we explain how we tax stock option income when your clients change their state of residence to or from California. We also address the ISO alternative minimum tax adjustment.

Change of Residency to California (Move-In)

When a taxpayer is granted an NQSO while a nonresident of California and later exercises it while a California resident, we tax the difference between the fair market value of the stock on the date of exercise and the option price. We recognize income at the point of exercise because the taxpayer acquires stock with a value greater than the exercise price. We tax the income because the taxpayer is a resident of this state when the income is recognized.

When a taxpayer exercises an ISO while a nonresident of California and later sells the stock in a qualifying disposition (the holding period requirements under Internal Revenue Code 422 are met) while a California resident, we tax the difference between the amount realized on the sale and the option price because the taxpayer is a California resident when the stock is sold.

Change of Residency from California (Move-Out)

Nonqualified Stock Options

When a taxpayer is granted an NQSO while a California resident and later exercises it while a nonresident, we properly characterize the income from its exercise as compensation for services with a source in the state where the taxpayer performed the services.

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Look for easy to read questionnaire, website in head of household program

A new webpage and an easy to read questionnaire highlight this year's head of household audit season.

The 2000 head of household audit season will begin in July with the mailing of the first batch of head of household questionnaires. You may notice the questionnaire is longer, two pages instead of one.

That's because we increased the print size in order to make it easier to read.

Also new this year is our Head of Household webpage. Scheduled to launch this fall, the webpage will offer information on the rules for qualifying for head of household filing status, our audit process, and answers to frequently asked questions.

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