A worked example
The sale, and where you are living when it happens
Ana, 43, single, in California. She founded her company six years ago and holds qualified small business stock she expects to sell in two years. She earns $185,000 in the meantime and spends $110,000.
“My federal tax on this sale is zero because of QSBS. What does California do to that, and what if I establish residency in Nevada first?”
What the projection shows
The two tax returns disagree completely about the same sale. Federally, §1202 excludes the whole gain and the sale is untaxed. California repealed its §1202 conformity in 2013 and taxes the gain as ordinary income, so the same year carries $1,211,485 of state tax against a federal bill of zero. Establishing residency in Nevada before the sale removes that entirely, and the two plans end up $6,294,558 apart in after-tax wealth. What the projection can't decide is whether the move would hold up. California uses a domicile and closest-connections test rather than counting days, and the year of a real move is split between two states.
What the projection also found
Nothing was missing from the inputs. These follow directly from the numbers above, under the assumptions this example uses.
- On the federal return, §1202 excludes $8,985,000 of the $8,985,000 gain. The state doesn't follow it: state tax that year is $1,211,485, compared with $14,391 if there were no sale.
The planner opens with this household already filled in. Change the balances, the ages or the assumptions to match your own situation, then run it.
A projection based on stated assumptions. Not financial or tax advice.