Does California Tax Deferred Compensation After I Move Abroad?

California taxes deferred compensation based on where you performed the services that earned it, not where you live when you receive the payment. If you earned stock options, RSUs, or nonqualified deferred compensation while working in California and later moved abroad, California claims a proportional share of the income when it vests or is paid out (California FTB: Nonresident Source Income).

How California allocates deferred compensation:

Example: You received RSUs with a 4-year vesting schedule while working in San Francisco. After 2 years, you transferred to London. When the RSUs vest in year 4, California claims 50% of the income (2 CA years/4 total years), which is taxable on Form 540NR as California-source income.

Key details for expats:

• The allocation follows you for years: RSUs with 4-year vesting, options held for a decade, and NQDC plans that pay out at retirement can all trigger California tax long after you leave
• California does not recognize the FEIE: even if your federal return excludes the income, California taxes its allocated share
• Withholding may not happen automatically: if your employer does not withhold California tax on the allocated portion, you must file and pay on your own
• Credits for foreign tax: California allows a credit for taxes paid to another state on the same income, but not for foreign taxes paid to another country

Planning before you leave California:

• Exercise options before departing to eliminate the allocation issue (all income sourced to CA in the exercise year)
• Track workdays carefully from the grant date onward; the allocation is based on actual days, not calendar months
• Consider early exercise of ISOs (83(b) election) to start the capital gains clock while still in CA

For more, see our California State Taxes for Expats guide.