What States Have Exit Taxes for Departing Residents?

The term “exit tax” can create confusion for those moving between states. A true exit tax is a federal charge on a person’s worldwide assets upon renouncing U.S. citizenship, which applies to certain high-net-worth individuals. For 2025, this involves a deemed sale of assets, with an exclusion for the first $890,000 of gain.

No state imposes an exit tax in this federal sense. The phrase “state exit tax” is a misnomer for a state’s authority to tax income earned within its borders, even if that income is paid after an individual moves away. States are not taxing the act of leaving, but are collecting tax on income connected to economic activities that occurred within their jurisdiction. This prevents individuals from avoiding state taxes by relocating before a large payment, like a bonus or commission, is disbursed.

The State “Exit Tax” Misconception

The concern over state “exit taxes” comes from a misunderstanding of the tax principle known as “income sourcing.” This principle gives a state the right to tax income generated from activities or property within its boundaries. The taxpayer’s residence at the time of payment does not change the income’s origin, or “source,” for tax purposes.

This system is different from a wealth tax, which is a tax on an individual’s total net worth. Sourced-income taxation targets specific earnings, not the entirety of a person’s assets.

Income Subject to Post-Move State Taxation

Certain types of income are commonly subject to these sourcing rules because their payment is often delayed. This delay can create a situation where an individual has moved before the income is received, triggering a nonresident tax obligation on sourced income.

Deferred Compensation

Non-qualified deferred compensation plans are arrangements where an employer promises to pay an employee in the future for work performed today. Because the income is earned while the employee was a resident of a state, that state can tax a pro-rata share of the eventual payout. This applies regardless of where the individual lives when the money is received.

Stock Options and Equity Compensation

Gains from equity compensation, such as stock options and restricted stock units (RSUs), are subject to sourcing rules. When an employee is granted these awards while working in one state and then moves before they vest, the former state will tax a portion of the income. The taxable amount is calculated based on the ratio of workdays in the state between the grant date and the vesting date.

Installment Sales

The proceeds from an installment sale of property can be taxed by the state where the property was located, even after the seller has moved. An installment sale allows the seller to receive payments over several years. If the property sold, such as a business or real estate, was in a high-tax state, that state will require the seller to pay capital gains tax on each installment payment as it is received.

State-Specific Tax Rules and Proposals

While many states have sourcing rules, a few are known for their rigorous enforcement and specific regulations targeting former residents. These states have well-defined procedures for tracking and taxing income that they determine was earned within their jurisdiction.

California

California has comprehensive and aggressively enforced rules for sourcing income. The California Franchise Tax Board has a detailed methodology for allocating income from stock options and other equity awards. If an employee is granted stock options while working in California, a portion of the future gain upon exercise will be considered California-source income, even if the employee has moved. The state’s allocation is based on the period from the grant date to the vest date.

New York

New York also has a robust system for taxing the income of former residents. The state’s rules are especially notable for their application to deferred compensation and pension payments derived from New York employment. If a person earned a pension over a 30-year career in New York and then retires to another state, New York will tax a pro-rata share of each pension distribution. This “look-back” approach ensures that compensation tied to New York labor is taxed by New York.

Other Notable States

Several other states, including New Jersey, Massachusetts, and Pennsylvania, have similar sourcing rules, although their application can vary. These states generally follow the principle of taxing nonresidents on income earned from sources within their borders. This includes wages, business income, and gains from the sale of property located in the state. The specific methods for allocating and reporting this income differ, but the underlying authority is the same.

Proposed Legislation

Much of the recent discussion about “exit taxes” has been driven by legislative proposals, not existing laws. For instance, a bill introduced in California, Assembly Bill 259, proposed a wealth tax that included a provision to tax a portion of a high-net-worth individual’s assets for up to a decade after they left the state. This proposal, which failed to advance, would have functioned more like a true exit tax. Similar concepts have been debated in other states, but it is important to distinguish these proposals from the current, established laws governing sourced-income taxation.