State Taxation of Non-Resident NQDC Distributions

[XTitan]

With Minnesota recently enacting their law to tax nonresidents on MN-earned NQDC money paid out in less than 10 years, is anybody hearing whether this is an isolated incident or whether this is a trend? I haven't heard of any new states looking at this, but maybe someone in this group has.

Anyone have a good source tax source by state?

[Steelerfan]

With Minnesota recently enacting their law to tax nonresidents on MN-earned NQDC money paid out in less than 10 years, is anybody hearing whether this is an isolated incident or whether this is a trend? I haven't heard of any new states looking at this, but maybe someone in this group has.

Anyone have a good source tax source by state?

Unfortunately, in my experience, Minn is coming into company with the majority of states that apply what is call the "source" tax rule. E.G. In PA, they seek to tax any compensation earned in the state regardless of when it is paid; NY, DE and many other states have similar rules. You can be caught off guard easily. the 10 year rule is there because of the federal statute that exempts from state source tax rules the taxation distributions from nonqualified plans that pay out in at least 10 years. I was depressed when I saw this because I always hope the source rule will go away some day.

I know of no source that compiles this data in any easy to access format, I have had to research each state's law separately and each time it is like entering the mind of a madman to figure out what heck they are doing.

[XTitan]

Thanks, I figured as much. I remembered when the source tax issue was debated that the 10 years represented a good compromise (i.e. no one was happy).

[401 Chaos]

My limited experience has been the same as Steelerfan's. I may have some of the history and background confused but I seemed to recall Minnesota used to follow some variant of the source rule (perhaps even more aggressively) but went away from that after the federal statute was passed and after some bad court cases limited their ability to go after former residents. In other words, they seemed to sort of give up on the source rule for a period. Now, however, they are going back so it's more like a return to their original position than a brand-new position. (Again, take all that with a grain of salt as it's been awhile since I've researched this and never looked at Minn too closely.)

There is an article in the Summer 2007 edition of The Tax Lawyer, the ABA Tax Section's periodic journal, that discusses relatively new rules in New York and their attempts to clarify allocation of income based on the source rule approach (which appears to borrow heavily on the federal tax rule approach for individuals who change from U.S. residents to nonresidents mid-year).

When I called my state's Tax of Revenue to ask if they had clear guidance or directives on this (in either or both a nonqualified stock option or less than 10-year deferred compensation plan arrangement) they seemed clueless. In the end it seems their general rules default to application of a source rule approach much like the other states (which I don't argue is illogical) but there was no very clear or express policy for any of that. This stuff gets to be a real mess for all involved when people retire to different states or move from state to state such that the option vesting is divided among different jurisdictions.

[Guest Exec_Ben_N_Ret_Med_Guru]

In PA, they seek to tax any compensation earned in the state regardless of when it is paid

PA changed this rule basically at the same time of the effective date of 409A.

[Steelerfan]

In PA, they seek to tax any compensation earned in the state regardless of when it is paid

PA changed this rule basically at the same time of the effective date of 409A.

I'm referring here only to the source tax rule, not the 2005 change of the timing of taxation of nonqualified salary deferrals to align with federal timing rules.