Lump-Sum Payments From Nonqualified Deferred Compensation Plans To Nonresident of New York Are Exempt From New York Income Tax


A recent advisory opinion from the New York State Department of Taxation and Finance concludes that payments received by an individual nonresident of New York in settlement of his benefits under two nonqualified deferred compensation plans of his former employer are exempt from New York State and local income tax, even though he performed services for his former employer in New York and each payment was made in a single lump-sum.

Source tax law -

The federal “source tax” law, 4 U.S.C.§ 114 (Pub. L. No. 104-95), enacted in 1996, essentially provides that only the state of which an individual is a resident or domiciliary may tax the individual on his or her retirement income. So, for example, if an employee participates in a tax-deferred retirement plan covered by the source tax law while working in New York and retires to a state with no income tax before receiving distributions from the plan, those distributions will escape state income tax, in New York or any other state. If, instead, the source tax exemption does not apply to such a former employee’s distributions, all or a portion of those distributions would be includible in the former employee’s New York source income and subject to New York income tax.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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