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Possible to Avoid State Tax on Severance?
Old 12-07-2015, 08:46 AM   #1
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Possible to Avoid State Tax on Severance?

I'm sure this has been asked before on this forum, but I couldn't find it in a quick search so:

My Megacorp is being kind enough to give a parting gift of a severance package upon my retirement at year's end. My question is whether I can move out of my high tax state (in which I have earned all my income), establish residency elsewhere and avoid paying state tax on the severance. I can elect to receive the payments over the 6 months following my departure. So it's certainly physically possible for me to move prior to receiving most (or even all) of the payments.

My question is whether the severance would still be considered taxable income in the state I would be departing or if all that matters is my state of residency upon receipt.
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Old 12-07-2015, 08:51 AM   #2
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Since taxes are cash basis, I think it would be the state that you are a resident in when you receive it... but expect that the state that you are moving from might make a grab for it.

Update your W-4 forms with your employer with your new state of residence before they pay you the severance to reduce that risk.
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Old 12-07-2015, 10:03 AM   #3
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I think it's where the money is earned, and severance is considered earned income. You might be inviting a battle with your state if you try to avoid paying. Are the potential legal fees, fines and interest worth it?


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Old 12-07-2015, 12:09 PM   #4
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Originally Posted by pb4uski View Post
Since taxes are cash basis, I think it would be the state that you are a resident in when you receive it... but expect that the state that you are moving from might make a grab for it.

Update your W-4 forms with your employer with your new state of residence before they pay you the severance to reduce that risk.
Upon further review it looks like for most states it is where the work was done... even for non-residents.

Quote:
Most states tax severance payments made to nonresidents for services performed in state, but a few differ. For example, the District of Columbia and Georgia tax severance payments made to residents, but those made to nonresidents are exempt from withholding.
Wage Withholding Woes: States Generally Conform to Federal Tax Treatment of Severance Pay But a Few Make Their Own Rules | Bloomberg BNA

However, what you might be able to do is defer 100% of your severance into your 401k (especially if it is paid in early 2016) and then if you are in a no or lower tax state when you withdraw it then the withdrawal would be income in the state you reside in when you make the withdrawal.

Quote:
One easy way to pay fewer taxes on severance pay is to contribute to a tax-deferred account like an individual retirement account (IRA). The contribution limit is $5,500 for 2015. If you’re over 50, you can put $1,000 more. Pamela Capalad, certified financial planner (CFP) at Brunch and Budget, said you should try to contribute the max if you can take advantage of that opportunity. (For more, see: Maxing Out Your 401(k): Does It Pay?)

Some employers might allow you to put your severance pay into your 401(k). The current limit is $18,000 and an additional $6,000 if you’re over 50.



Read more: How to Minimize Taxes on Severance Pay How to Minimize Taxes on Severance Pay
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Old 12-07-2015, 01:35 PM   #5
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At least in Mass, if you are being paid from a Mass company you owe the tax regardless of where you live.
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Old 12-07-2015, 01:53 PM   #6
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If you work for a company that has an office in the state you are moving to, it is no different than other employees that work there.
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Old 12-07-2015, 02:26 PM   #7
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At least in Mass, if you are being paid from a Mass company you owe the tax regardless of where you live.
That doesn't make sense. Based on what you wrote if someone worked in a California branch of a Massachusetts based company you think they would owe taxes to Massachusetts?

It is where the work is done, not where the company that writes the check is based.
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Old 12-07-2015, 02:29 PM   #8
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That doesn't make sense. Based on what you wrote if someone worked in a California branch of a Massachusetts based company you think they would owe taxes to Massachusetts?

It is where the work is done, not where the company that writes the check is based.
We had a Mass office and a CA (and TX and FL) office which we had to set up as a separate entity (don't recall the details).

I DO know that if you lived in NH (no inc tax) and worked for us in MA you had to pay MA income tax. I was working in France and had to pay MA income tax even though we had a French office (but I was paid by the MA office).
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Old 12-07-2015, 02:36 PM   #9
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Much of this also depends on if the state has a reciprocity agreement on taxes with another state. Have to look at the state statues. When I worked in Chicago but lived in Indiana I had to file and pay income taxes to both states with a credit from Illinois for their taxes paid.
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Old 12-07-2015, 02:37 PM   #10
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In the case of the NH resident, the work is being done in Mass which is why the tax is owed on that income.

I traveled a lot and worked in many states over the course of a year. The time on our timesheets included a code for where the work was done and relevant withholdings were done. Interestingly, each state had different rules... some states had a minimum amount over which a return was needed and others even if I worked only a couple hours a return was required.
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Old 12-07-2015, 04:36 PM   #11
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In the case of the NH resident, the work is being done in Mass which is why the tax is owed on that income.

I traveled a lot and worked in many states over the course of a year. The time on our timesheets included a code for where the work was done and relevant withholdings were done. Interestingly, each state had different rules... some states had a minimum amount over which a return was needed and others even if I worked only a couple hours a return was required.
Yeah. There's a real reason here that rock concerts end before 11PM around here....so the non resident artists can scurry over the border before midnight; an extra night here can be costly.
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Old 12-07-2015, 05:06 PM   #12
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Just about every state income tax return has a computation that would answer your question. This is a very common occurrence. And most state income tax return forms can be viewed online.

Some states require you to be a resident for 6 months and 1 day. I have a friend that lives in Florida and another state, and he keeps a diary on where he is day by day for income tax reasons. Needless to say, he meets that requirement for Florida.
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