State Tax withholding

[Guest RBlaine]

Probably discussed before, but I only saw it regarding annuities.

Participant lives and works in State A, which requires 5% withholding on distributions that are subject to the 20% federal withholding. Participant quits and immediately moves to State B which has no state income tax. Participant requests immediate distribution.

I'm thinking that the participant is probably not yet a resident of State B and the income should be State A income, and therefore, subject to the mandatory 5% withholding. However, I don't know this to be the case, and the person handling the withholding says no, without any particular cite.

I know that there is a federal law that prohibits states from taxing payments made to folks in a state where they do not live. Does it require that they live there for a certain amount of time, or does it apply the next day?

[david rigby]

Is it the responsibility of the plan administrator and/or trustee to determine whether or not a participant is a "legal resident" of a state? How would a participant who moves to another state not be a resident of that state?

[masteff]

Unless you have reason to suspect the change of address is fraudulent to avoid withholding taxes, process based on the state provided by the participant. If truly concerned, then review the withholding rules for State A and see if they explicitly require withholding on a part-year resident who is no longer in residence (I've never encountered such). If not explicit, then I'd leave it to the participant to reconcile any tax liability w/ State A when they file their state income tax returns.

[Appleby]

I agree that you should accept the Participant’s ‘word for it’.

But if you wanted to check, one way would be to review the laws of State B to determine their definition of ‘resident’ for tax purposes

The thread at http://benefitslink.com/boards/index.php?s...ic=19541&hl may help

[Guest mjb]

Every state income tax form I have ever seen taxes part year residents from the date they move into the state until the end of the year. So you are deemed a resident from the date you move in. I dont know why the PA cares about state A since the 1099 will be mailed to the participant in state B. I dont know of any requirement to send 1099 to state tax authorities. I dont know how a person can be a resident of a state after they sell their residence and move out. People move all the time from high tax states to states without income tax- FL, NV before receiving distributions and rely on federal law to prevent taxation.

[Guest RBlaine]

Every state income tax form I have ever seen taxes part year residents from the date they move into the state until the end of the year. So you are deemed a resident from the date you move in. I dont know why the PA cares about state A since the 1099 will be mailed to the participant in state B. I dont know of any requirement to send 1099 to state tax authorities. I dont know how a person can be a resident of a state after they sell their residence and move out. People move all the time from high tax states to states without income tax- FL, NV before receiving distributions and rely on federal law to prevent taxation.

The last time I did a part year form was 15+ years ago and I don't do individual taxes, which is why I don't know how this is handled.

The idiotic thing about our mandatory state withholding is that some amount ($6,000) of pension income is not subject to taxation. Many of our distributions are under this amount, so taxes are withheld on amounts that, in the end, are not taxable distributions.

[J Simmons]

4 USC sec 114 provides, after 1995, that "No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State (as determined under the laws of such State)."

State A can tax the retirement income if the person is then a domiciliary or resident of State A. Domiciliary connotes permanent residence; when alternatively used as in the federal statute, the reference to 'residence' usually implies "actual residence". For example, see page 3 of the 2006 Virginia 760, Resident Individual Income Tax Booklet, where domiciliary is explained as your 'permanent residence', the place whenever you are absent, you plan to return. And a person is a legal resident of Virginia if physically present in Virginia more than 183 days, even if a domiciliary resident of another state.

In some states, domciliary (permanent) residence does not end until the person becomes a domiciliary (permanent) resident in another state or country. Residence in State B, for example, is established at the time the person is first in State B with the intent to remain there indefinitely. Until then, the person remains a domiciliary (permanent) resident of State A. This standard is what renders one yet taxable in State A for income while temporarily in State B, such as on a two-week vacation in State B. It is a facts-and-circumstances analysis of whether one's actions validate or contradict the claimed intention.

One way that distributees that try to avoid state income tax by moving to State B stumble is by having the intention all along to leave State B after a time and permanently re-locate in State C (or back in State A) that has an income tax. That is, the person is only in the income tax-free State B as an extended stop-over. While there, they take the distribution and later move. State A yet has a claim for its income tax applying. That's because the person's residence in State A had not ended by the time the withdrawal was taken.

Some plans will ask a distributee that now claims to reside in State B to either agree to the tax withholding required by State A and let the distributee sort that out with State A, or agree to reimburse the PA for any amount that State A might successfully exact out of the PA for failure to state tax withhold regarding the distribution.

[Guest mjb]

1. How does a state make a claim against a PA for taxes? I thought ERISA preempted state tax laws as well as state laws that prevent uniform administration of the plan.

2. If a plan does not have presence in a state how can the plan be required to wothhold state income tax? If Plan A is adminstered from State B where the trust for the plan is sited how can State C demand that Plan A withhold state C tax on a payment to a participant who lives in state C. Under ERISA 502 a plan is an entity which can be sued or sue in in own name. To me the state income tax witholding is no different than requiring an internet based company to withhold state sales taxes on purchases by customers who reside in a state where the company has no presence.

3. The rules are different for insurance companies which must be licensed in each state where they do businees and as a condition to being licensed must agree to withhold taxes on payments made from the contracts.