Residency and Stock Option Income: The Telecommuter's Dilemma

Jordan's 2023 California residency must be analyzed under the two tests: domicile and statutory residence. Domicile is the place one intends to return to; it changes only upon physical presence in a new location plus intent to remain there permanently or indefinitely. Jordan moved to Nevada in March 2022 with a rental apartment and gym membership, but retained significant California indicia: driver's license, voter registration, and bank account. These facts suggest Jordan may not have established a new domicile in Nevada. If domicile remains California, Jordan is a resident for all of 2023, and all income is taxable by California regardless of source. Alternatively, even if domicile changed, Jordan may be a statutory resident under R&TC §17014 if present in California for more than nine months (approximately 273 days) and maintaining a permanent place of abode in California. Jordan spent 165 days in California, which is less than nine months, so statutory residency does not apply. However, the retention of a California driver's license and voter registration are strong indicia of domicile. The FTB likely prevails on domicile unless Jordan can prove a definite intention to change domicile, which is difficult given the retained ties. Therefore, Jordan is likely a full-year resident, and all $200,000 is taxable. If Jordan were a nonresident, only California-source income would be taxable. Wages are sourced to where the work is performed; the portion performed in California would be taxable. Stock option income is generally sourced to California based on workdays from grant to exercise, but if the grant occurred while a California resident, California may tax the entire option income under the deferred compensation rules. Thus, even as a nonresident, the $80,000 option income might be fully taxable. The FTB's notice is likely correct on residency, but the sourcing of option income requires further analysis.

If Jordan is a nonresident for 2023, California may tax only income from California sources. For stock options, California follows the apportionment method for deferred compensation: income is sourced based on the ratio of workdays performed in California during the period from grant to exercise to total workdays during that period. The company allocated 60% to California based on workdays from grant (2018) to exercise (2023). This allocation appears reasonable, but it must be verified. The grant occurred while Jordan was a California resident, so all workdays from grant to the date of move (March 2022) are California workdays. After the move, only workdays physically in California count. If Jordan worked primarily in California until March 2022, the 60% allocation could be accurate. However, if the option grant contained a provision that the income is not attributable to services performed after the move, the allocation might differ. Under California law, the stock option income is generally treated as compensation for services, and the source is determined by where the services were performed. The 60% allocation would be accepted if it reflects the actual workday ratio. Jordan should retain detailed workday records. If the allocation is correct, $48,000 (60% of $80,000) is California-source and taxable to a nonresident. The remaining $32,000 is not taxable by California. If Jordan had been a resident at exercise, the entire $80,000 would be taxable. The FTB's assertion that all $200,000 is California-source is incorrect if Jordan is a nonresident; only the California-source portion of wages and the 60% of option income would be taxable.