Discussion:Deferred Comp -- State Income Tax

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Discussion Forum Index --> Basic Tax Questions --> Deferred Comp -- State Income Tax


Discussion Forum Index --> Tax Questions --> Deferred Comp -- State Income Tax

Kokomo (talk|edits) said:

7 November 2008
I have a new client who used to work in Oregon and participated in her employer Deferred Compensation Plan. She moved to CA after she retired and had started drawing money out of her Deferred Compensation plan. Fed and State (State of OR) income taxes are withheld from her Def. Comp. distributions. Since the SOURCE of that income was Oregon (where the money was originally earned), I am thinking that her distributions should be taxed by the State of Oregon and not the State of CA. Correct?

i.e. we will report the income on the OR return, pay the state tax liability owed to OR if any, and claim a tax credit on the CA return for any taxes paid to OR.

KatieJ (talk|edits) said:

8 November 2008
Whether Oregon can tax this income depends on what kind of plan it is. Federal law (4 USC Sec. 114) prohibits states from taxing certain retirement income of nonresidents on a source basis. This applies to all qualified plans, IRAs, Keoghs, 401(k)s, etc. It applies to nonqualified plans (1) if distributions are receivable in a series of substantially equal payments, not less frequently than annually,over the recipient’s life or joint life expectancy or over a period of not less than 10 years, or (2) if the nonqualified plan is one that was established to provide highly compensated employees with benefits not available from a qualified plan due to ERISA restrictions, and the distributions are received after termination of employment.

If the deferred comp plan falls into either of those categories, Oregon cannot tax the income to a nonresident even though it is Oregon source income (paid as compensation for services performed in Oregon). In that case you will have to file a nonresident return with Oregon to get the withholding refunded, and the client should take steps to stop the withholding of Oregon tax.

Of course California will tax the income because the recipient is a CA resident. If the plan is not protected by the federal law from taxation in Oregon, California will allow credit for the Oregon tax.

Southparkcpa (talk|edits) said:

8 November 2008
Katie

You are the best!!!

That said, most deferred comp plans have limited restrictions on withdrawals other than age and retirement. i.e, I have one and once I stop working and hit 59 1/2 I can take it all if I prefer in one year. Also, here in NC, as the big banks "lay off" some of the high comp employees, they are releasing the DC and these people are receiveing a LARGE W2 of their DC. The banks position is , if you are not an employee, we will not hold your money.

That said, I am certain that Oregon has determined it is entitled to taxation on these funds, has proplerly withheld and that a non resident return is required.

Kokomo (talk|edits) said:

12 November 2008
Thank you very much, Katie and Southparkcpa. My client's non-qualified plan does not fall into the two categories Katie mentioned (her distributions are only over 3-4 years and she was not a highly compensated employee); and as Southparkcpa mentioned, chances are Oregon knows what they are doing when they withheld from her distribution checks. I feel comfortable now with our conclusion to file a NR return for Oregon and claim a credit on the CA resident return. Thank you very much again for all your help.

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