NY deferred comp & stock options

[joanmcq]

Client worked in NY from Nov. 2004 to April 2007. During that time he was granted NQSOs and paid into deferred comp. Moved to CA and continued working for the same company. Fast forward to 2014, and he leaves company and as part of his severance package is will be paid out the deferred comp over the next 10 years. He also did same-day exercise & sell of the options. Due to NY's weird reporting rules, of course all of his box 1 wages for 2014 are reported to NY. So I'm trying to allocate the deferred comp/options.

First off, the IT 203-F tells me I should use the IT 203-B for the option allocation since they are readily valued on the date of grant. But the B seems to only pertain to current year allocations. Does this mean the NQSOs are not taxed to NY? Seems odd since NY is pretty aggressive in taxing any NY source income.

Then for the deferred comp, the IT 203-F refers to the three years before termination. He hasn't worked in NY since 2007. Or does termination date refer to the year he left NY? I then have no reference for what was NY source vs. total income. Of course most of these years, his income was 100% NY. If termination means the former, none of his income was NY source. If the former it looks like any will overtax his income. And if I knew the actual amount of the deferred comp that was earned in NY, I wouldn't be having this issue. Or is line 1c simply the total amount of deferred comp?

Of course he is looking for his old tax returns but may have destroyed them. And he can't get W2s from the company that far back.

I think I'll go back to some of the W2 & a Sch. A returns in the bin.

[joanmcq]

C'mon, hasn't anyone in NJ or CT or MA dealt with this?

[jklcpa]

Client worked in NY from Nov. 2004 to April 2007. During that time he was granted NQSOs and paid into deferred comp. Moved to CA and continued working for the same company. Fast forward to 2014, and he leaves company and as part of his severance package is will be paid out the deferred comp over the next 10 years. He also did same-day exercise & sell of the options. Due to NY's weird reporting rules, of course all of his box 1 wages for 2014 are reported to NY. So I'm trying to allocate the deferred comp/options.

First off, the IT 203-F tells me I should use the IT 203-B for the option allocation since they are readily valued on the date of grant. But the B seems to only pertain to current year allocations. Does this mean the NQSOs are not taxed to NY? Seems odd since NY is pretty aggressive in taxing any NY source income.

Then for the deferred comp, the IT 203-F refers to the three years before termination. He hasn't worked in NY since 2007. Or does termination date refer to the year he left NY? I then have no reference for what was NY source vs. total income. Of course most of these years, his income was 100% NY. If termination means the former, none of his income was NY source. If the former it looks like any will overtax his income. And if I knew the actual amount of the deferred comp that was earned in NY, I wouldn't be having this issue. Or is line 1c simply the total amount of deferred comp?

Of course he is looking for his old tax returns but may have destroyed them. And he can't get W2s from the company that far back.

I think I'll go back to some of the W2 & a Sch. A returns in the bin.

 

 

This is all very weak, but I'll share what I found so that maybe it will help you in some way.  I think that 10 years might be the key for your client. I can't find an actual reference in the code or regs (somewhere in 409A maybe?) for this statement that I found in 3 separate articles that maybe you can use as a jumping off point for your further research. What I found says:

Under federal source taxation law, deferred compensation earned by an employee or former employee while a resident but paid when the individual is a nonresident, cannot be subject to that state’s income tax if:

i) compensation is payable over the individual’s life or life expectancy or is paid in installments scheduled over 10 or more years; or

ii) the compensation is paid under certain qualified retirement plans or “excess plans”.

 

That quote was found in the following article that is about retirement planning when it involves deferred comp and deciding on what state to live in, and how this will affect the taxes: http://www.ebsplans.com/linked/ebs%20news%20sep%2008.pdf

Found this article entitled "New York Taxes A Portion of Stock Option Gain of Nonresident Retiree" http://benefitsnotes.com/2012/12/new-york-taxes-a-portion-of-stock-option-gain-of-nonresident-retiree/

and this one from the same blog entitled "Nonresident Employee Avoids New York Taxes on Deferred Compensation Payment" http://benefitsnotes.com/2013/05/nonresident-employee-avoids-new-york-taxes-on-deferred-compensation-payment/

 

 

As I said, weak at best, but I thought I may as well share it in hopes that it will lead you to finding substantial authority for allocating this income.

[joanmcq]

That helps a lot! Now I know how to allocate the options, and since all I have to go on is that there is income and withholding allocated to NY, perhaps the deferred comp isn't taxable to NY.

[jklcpa]

Joan, I found where that reference came from about the states not being allowed to tax retirement income that meets the criteria I found in those articles. It is in Section 114 of Title 4 of the US Code, specifically  sec 114(a) and 114(b )(I).   This is the section: https://www.law.cornell.edu/uscode/text/4/114 .

 

Here's another interesting article from a law firm that finally led me to the proper reference:  NY Acts on Taxation of Nonresident Retirement Income, While Recently-enacted Federal Legislation Prohibits States from Taxing Retirement Income of Nonresident Partners