Discussion:Active Duty Military, Non-Military Iincome

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Discussion Forum Index --> Advanced Tax Questions --> Active Duty Military, Non-Military Iincome


Discussion Forum Index --> Tax Questions --> Active Duty Military, Non-Military Iincome

Quigs (talk|edits) said:

24 April 2009
Anyone have experience with active duty military?

Client is active duty military stationed in California. He is a resident of Florida. Prior to military, he worked as an airline pilot in GA as a union member (2001-2002). In 2008 he received a substantial payout ($90,000) from the GA company where he used to work. It's an airline that went bankrupt and his DB was terminated. (I know, very strange) This is w-2 income for 2008 from the airline. Client was never in GA during 2008. The few other airline pilots I have worked with have paid tax in the state where they reside, not where there "hub" is or where the company headquarters are, because they don't spend a majority of the time in either.

Obviously, we would like to pay state tax in FL (zero), rather than GA. It's non-California income, so I don't see how California could possibly tax the amount, because the military member is a resident of Florida. I assume we have to pay Georgia income tax, even if the ex-pilot, active duty military member is officilally domiciled in Florida?

Thanks!

KatieJ (talk|edits) said:

24 April 2009
Did the payer withhold GA state income tax? Just curious ...

I agree that this payment is not subject to California tax, since it is clearly not California source income and he is a nonresident of California. (Federal law prevents California from treating him as a resident by virtue of his being stationed here on permanent military orders.) It would be taxable in Florida if Florida treated him as a resident for individual income tax purposes, which of course it doesn't because it has no such tax.

Whether it is taxable in GA or elsewhere depends on the character of the payment. If it is a payment for the relinquishment of an intangible right (e.g., the right to employment) under a contract, it may be properly characterized as a payment for an intangible, which has its source at the residence of the taxpayer -- i.e., Florida source income, not taxable by Georgia. On the other hand, if it represents compensation for services, then the general rule would assign it to the state where the services were performed -- which may be Georgia. However, there are some special sourcing rules for employees in interstate transportation in federal law (49 USCS @ 40116(f)), which restrict the taxation of employees of interstate air carriers to the state of residence or the state where more than 50% of the services are performed. If he was an interstate employee of an air carrier, only the state where he resided at the time he performed the services to earn this income, or the state where he performed more than 50% of the services, has the power to tax the income.

You would need to know more about the payment, I think, to be able to determine what its source is for state taxation.

I'd have to know more about the circumstances of the payment to be more specific.

Quigs (talk|edits) said:

26 April 2009
KatieJ - Thanks so much for the thoughtful and thorough reply. This REALLY helps.

The income from the GA source was paid as supplimental earnings income. Witholding was taken by GA at the supplemental rate, but the airline told my client that was only because that's their policy because they did not have another state of residency on file for my client. (His fault, but he didn't think this payment was coming his way, as he has been overseas/overwhelmed with the military and family for the last few years).

Thanks so much for the situs in Title 49. I believe that this is considered income related to air carrier interstate commerce, and therefore is taxable to the state of residence, considering he never stepped foot in Georgia for the year.

Thanks again, Katie, for the great help.

Quigs

KatieJ (talk|edits) said:

27 April 2009
Well, Quigs, it seems to me that this is deferred compensation, i.e., it is not for services that were performed in 2008, but that were performed in some prior year or years. The state where he was a resident when the services were performed would have the power, under the federal law, to tax the compensation regardless of when it is received. If he was a Georgia resident at that time, I would think it is Georgia source income.

Quigs (talk|edits) said:

27 April 2009
Thanks KatieJ.

This payment was actually ( I have since found out) a bankruptcy settlement of an unsecured claim for the termination of the employees defined benefit plan during the bankruptcy. So it is not necessarily deferred comp, I don't believe. I have tried to get as much info from him as possible. He has given me some documentation from his pilots union, but it's still not perfectly clear. It is termed an "unsecured claim against Delta" in which the employee chose to sell the claim for cash rather than receive equity in the emerged publicly traded company. Again, the proceeds were paid as w-2 income with federal and GA supplemental witholding.

I think I need to do a little further research. Any more ideas are welcome!

KatieJ (talk|edits) said:

27 April 2009
Ah, ha. I think you have some ground to stand on to treat this as a payment for an intangible, sourced to the taxpayer's residence, i.e., Florida in this case. Of course you will have to file a nonresident return with GA to claim a refund of the tax that was withheld. The more information and documentation you have by the time GA acts on the claim, the better.

Trillium (talk|edits) said:

27 April 2009
Quigs, separate from the state tax issue, take a look at HR 7327 last year (here's the Joint Committee Technical Explanation of HR 7327, see pg 20, which is actually pg 23 of the pdf), which provided some leeway on rolling similar payments into a Roth if done within 180 days of receipt and/or of 12/23/08, which is when the legislation was signed. There's some info in Pub 590, too.

Although you said he got a W-2 on this, and I thought it was supposed to have been reported on form 8935, so maybe yours is something different. But it may be something he'd want to consider.

KatieJ (talk|edits) said:

27 April 2009
Second thoughts, Quigs: it actually IS deferred comp, isn't it? If the taxpayer had received retirement benefits from the plan, that certainly would have been deferred compensation. It appears what you have here is a settlement of a claim for deferred comp -- you're getting something less, perhaps, than you would have received under the original plan, but it's still deferred comp.

Now, federal law prevents states from taxing certain types of retirement income of nonresidents on a source basis. So if the taxpayer had received benefits under the defined benefit plan while a nonresident of GA, federal law would prevent GA from taxing that income even if all of the services to earn it had been performed in GA. Whether that protection extends to a settlement of this kind is not so clear. See 4 USC Sec. 114.

Quigs (talk|edits) said:

28 April 2009
Trillium, Thanks for the heads up. We are already working on scraping up the cash to make the rollover/contribution by June 21, 2009 in accordance with WRERA. Wish we all got such a good deal!

Quigs (talk|edits) said:

28 April 2009
KatieJ - I think if it was paid under 4 USC Sec. 114 it would be 1099 income. Isn't that right? Reading further union documentation it seems this payment was only triggered by the termination of the DB, but it is really for working under the bankruptcy "contract" for 2007-2011. It really doesn't sound like deferred comp to me. As an unsecured debt, there is no trust or deferred account, the union boys were just another creditor of the bankrupt company. Maybe I should have been a bankruptcy attorney. :) And thanks again!

Riley2 (talk|edits) said:

28 April 2009
Agree that the amount received from the BK trustee probably should have been reported on Form 8935, making the amount eligible for a rollover to a Roth account.

KatieJ (talk|edits) said:

28 April 2009
Well, a defined benefit pension would have been reported on a 1099R or maybe a W-2P, but so what? The question is what kind of income it is, not what form it was (rightly or wrongly) reported on. Income from a defined benefit pension plan clearly is protected from nonresident state taxation by 4 USC Sec. 114. It would seem logical to say that a payment in settlement of rights under such a plan on its termination would be subject to the same rule -- but the statute doesn't specifically say so.

I don't understand "working under the bankruptcy contract for 2007-2011." Are you saying this is a settlement of the taxpayer's right to continued employment during the bankruptcy of the employer, and not a settlement of his right to benefits under the DB plan?

Riley2 (talk|edits) said:

28 April 2009
Quigs said that the amount in question will be rolled over to a Roth. Not sure how that impacts state taxation since the federal rollover provision for qualifying airline payments was adopted in December of 2008, and I am not sure how many states have adopted this provision. I seem to recall that Georgia can assign residency status to someone who has no actual physical presence in the state.

KatieJ (talk|edits) said:

29 April 2009
Georgia does indeed have a very broad definition of residence for tax purposes (Ga. Code Ann. ยง48-7-20). However, any state that defines tax residence to include all domiciliaries, without exception for extended absence, generally will hold that a domiciliary who has not established a new domicile elsewhere remains domiciled and resident in the state even if not physically present at all during the tax year or for even longer periods of time. Georgia is by no means the only example of that.

We haven't discussed the possibility that Quigs's client is still a GA resident for tax purposes. Federal law (the Servicemembers' Civil Relief Act) prevents states from considering a military member to have changed domicile or residence by virtue of being stationed somewhere else on permanent military orders. As a rule, a military member's domicile remains at the place where he or she was domiciled at the time of enlistment. That place is the "home of record" on the military records -- the place the military will pay your way back to when you separate from service. Home of record can be changed during military service under conditions set by the service, which can vary from branch to branch, from time to time, and even from duty station to duty station. However, it's my understanding that the military usually will not change a member's home of record to a place where the member is not permanently stationed at the time the change is made.

While the home of record is not necessarily the member's domicile under common-law standards, it's a convenient proxy, and the states generally rely on it. So if Quigs's client's military home of record is Florida, he's probably clear of Georgia.

Of course, if he IS domiciled in Georgia, ALL of his income, including his military compensation, is subject to GA tax. Most military compensation is taxable to Georgia residents.

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