10-year rule nuances

[scottalaniz]

Assume a NQDC participant works in a state with income taxes and retires to a tax-free state.  She has two accounts within her deferred comp plan: a 10-year account, paying her $100k per year beginning in the year after retirement.  The second account is a lump-sum account, paying out $50k in the year after retirement.  She'll receive all the payments while residing in the no-tax state. 

My question...is there state income tax liability on the $50k lump sum from the source state?  

Instead of a lump sum, what if she had a 5-year installment of $50k per year.  Would that be treated separately from the 10-year payment stream as well?

Asked differently, is the 10-year rule interpreted to mean only specific accounts with at least a 10-year stream (or longer) within an employer's NQDC plan are taxed at the retirement state's income tax rate?  Or, is the rule interpreted more broadly.  Meaning as long as a combination of accounts within an employers' NQDC plan payout for 10 years or more, then all the payments are exempt from source state income taxation?

[XTitan]

The missing piece is that the minimum of 10 years of installments also requires substantially equal periodic payments (4 USC 114(b)(1)(I)(i)), so two interpretations:

(1) just those accounts that have at least 10 years of installments escape state-of-earnings income taxation

(2) since the entire distribution stream is not substantially equal,  all the distributions are subject to state-of-earnings income taxation

I do not think I've seen an interpretation that says if at least one account is at least 10 years, then the entire distribution escapes state-of-earnings income taxation.

[HCE]

Scottalaniz -

Did you ever figure this one out?  I'm in a similar situation.

[Peter Gulia]

Here’s 4 U.S.C. § 114: http://uscode.house.gov/view.xhtml?req=(title:4 section:114 edition:prelim) OR (granuleid:USC-prelim-title4-section114)&f=treesort&edition=prelim&num=0&jumpTo=true

Also, one might research the State’s income tax law. A State’s law might provide (or be interpreted to provide) an exclusion more generous than Federal law commands.