What State is it taxable in?

[austin3515]

Participant works in State A where he accumulates $1,000,000 in a deferred comp plan. Participant retires and moves to a state with no income tax, and then closes his account 6 weeks later. Is this good tax advice, or will State A claim that it is due some income taxes because the money accrued in their state?

Edit: The Participant moved BEFORE constructive receipt.

[Peter Gulia]

Consider the potential application or non-application of section 114 of title 4 of the United States Code:

§114. Limitation on State income taxation of certain pension income

(a) 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).

(b) For purposes of this section—

(1) The term “retirement income” means any income from—

(A) a qualified trust under section 401(a) of the Internal Revenue Code of 1986 that is exempt under section 501(a) from taxation;

(B) a simplified employee pension as defined in section 408(k) of such Code;

© an annuity plan described in section 403(a) of such Code;

(D) an annuity contract described in section 403(b) of such Code;

(E) an individual retirement plan described in section 7701(a)(37) of such Code;

(F) an eligible deferred compensation plan (as defined in section 457 of such Code);

(G) a governmental plan (as defined in section 414(d) of such Code);

(H) a trust described in section 501©(18) of such Code; or

(I) any plan, program, or arrangement described in section 3121(v)(2)© of such Code (or any plan, program, or arrangement that is in writing, that provides for retirement payments in recognition of prior service to be made to a retired partner, and that is in effect immediately before retirement begins), if such income—

(i) is part of a series of substantially equal periodic payments (not less frequently than annually which may include income described in subparagraphs (A) through (H)) made for—

(I) the life or life expectancy of the recipient (or the joint lives or joint life expectancies of the recipient and the designated beneficiary of the recipient), or

(II) a period of not less than 10 years, or

(ii) is a payment received after termination of employment and under a plan, program, or arrangement (to which such employment relates) maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed by 1 or more of sections 401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k), or 415 of such Code or any other limitation on contributions or benefits in such Code on plans to which any of such sections apply.

The fact that payments may be adjusted from time to time pursuant to such plan, program, or arrangement to limit total disbursements under a predetermined formula, or to provide cost of living or similar adjustments, will not cause the periodic payments provided under such plan, program, or arrangement to fail the “substantially equal periodic payments” test.

Such term includes any retired or retainer pay of a member or former member of a uniform service computed under chapter 71 of title 10, United States Code.

(2) The term “income tax” has the meaning given such term by section 110©.

(3) The term “State” includes any political subdivision of a State, the District of Columbia, and the possessions of the United States.

(4) For purposes of this section, the term “retired partner” is an individual who is described as a partner in section 7701(a)(2) of the Internal Revenue Code of 1986 and who is retired under such individual's partnership agreement.

(e) ¹ Nothing in this section shall be construed as having any effect on the application of section 514 of the Employee Retirement Income Security Act of 1974.

Consider too that this Federal statute allows each State to define who is its resident or domiciliary. If the Federal statute's protection concerning "qualified-like" retirement income otherwise would apply, the participant described in your hypothetical might want his or her tax lawyer's advice about whether the participant is a resident or domiciliary of State A.

[austin3515]

You're obviously very well versed here - is the answer "maybe" it is taxable in State A? I did not see in the list anything that would pull in a non-qualified deferred comp plan.

[Peter Gulia]

Section 114(b)(1)(I) refers to Internal Revenue Code section 3121(v)(2)©, which describes a nonqualified deferred compensation plan.

But unlike the rule for "qualified-like" plans, section 114's rule on what retirement income a State can't tax applies for a nonqualified plan only concerning "substantially equal periodic payments" for life or at least ten years.

If the hypothetical participant's $1 million payout from a nonqualified plan was paid in a single sum, that fact might have lost whatever protection section 114 otherwise might have provided.

If not precluded by 4 U.S.C. 114, a State might tax the portion of a deferred compensation payout that accrued while the participant was a resident of, or worked in, the State.