Let's face it, California taxes suck. They were bad before the Trump tax plan limited you to deducting $10k in state taxes on your federal tax return. With the new tax plan, once you make over $141,455 in California, you've maxed out your state and local tax (SALT) deduction. That means your effective tax rate jumps from 25.01% to 32.08%, and your marginal tax rate goes from 25.45% to 34.75%.

You might think you're safe because you exercised your options and held the stock for a year to get a more favorable capital gains tax rate. You'd be wrong. California taxes all income equally, including bonuses and capital gains.

An Example from the Lyft IPO

I haven't been able to come up with a meaningful estimate of employee payouts from the Lyft S-1 filing. 5% shareholders only account for about 50% of the stock, but that excludes several large investors. However, Redfin estimates that Lyft employees hold $1.5B worth of Lyft stock at the IPO price. Divide that by 5000 employees, the average payout comes out to $300k.

Suppose you're a Lyft employee with an annual salary of $150k, slightly more than the average Software Engineer salary of $146k to make the math easy. Add in $300k of capital gains. You owe $37,546 in Federal income taxes, plus $54,672 in Federal capital gains tax.

Your effective capital gains rate of 18.22% is considerably lower than your effective Federal income tax rate of 25.03%. However, California taxes the $300k capital gains as ordinary income, so you will pay state income taxes on $450k. That adds up to $41,303 in state income tax, and you can only deduct $10k of that.

When your total income exceeds $937,560, your California state income tax hits $100k. No surprise that former Uber executives are leaving the state.

Takeaways

If you're about to get a multiple six figure windfall, avoiding state income tax can make the difference between early retirement and an extra decade of work. If you're cashing out $750k, you may end up with a $100k state tax bill. That's almost 1 year of post-tax salary at $150k. Even if you had to quit your job, you'd be better off taking 6 months off in Florida than if you collected a paycheck and paid your state income taxes.