NUA and State Income Taxes
Does anyone know, in general, how States with an income tax treat NUA distributions? My state does not have a separate capital gains tax rate and only looks at the Federal Adjusted Gross Income for tax purposes. Does this mean that 100% of the distribution would be subject to State Income Tax?
Permalink Submitted by Alan Spross on Tue, 2007-10-16 00:55
Only the cost basis would be subject to state and federal income taxes in the year of the LSD. However, when the company shares are sold the federal tax rate would be the LT cap gain rate on the NUA, while the state rate would be the state’s marginal ordinary income rate because the state does not have a separate treatment for LT gains.
The bottom line here is that NUA is slightly more advantageous in a state that does have a lower LT cap gain rate than in those that do not. This advantage does not appear until the year the shares are actually sold.