Possible to Avoid State Tax on Severance?

[stepford]

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.

 

[pb4uski]

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.

 

[Dash man]

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?


Sent from my iPhone using Early Retirement Forum

 

[pb4uski]

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.

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.

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
Follow us: Investopedia on Facebook

 

[marko]

At least in Mass, if you are being paid from a Mass company you owe the tax regardless of where you live.

 

[Senator]

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.

 

[pb4uski]

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.

 

[marko]

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).

 

[Running_Man]

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.

 

[pb4uski]

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.

 

[marko]

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.

 

[Bamaman]

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.

 

[BluRoo]

Me too - What was the outcome of your situation?

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.

I received a buyout for early retirement, cashed out vacation leave, and cashed out other leave earned (not sick leave) as a part of a separation package. Under federal and state laws, all of it meets the definition of supplemental wages, not income.


My final day was a Friday at the end of a pay period. I had already filed W-4 paperwork with my new address in a new state. I filed non-residency paperwork with my new address at several city offices, announcing my intent to move out of state (asked to be removed from voter rolls). I never had a state ID or driver's license from this state because I was only here to work, and planned to leave immediately upon finishing work. I packed bags and moved out of state over the weekend. I established residency in the new state by obtaining a new driver's license and registering to vote in the new state.


I received my supplemental income statement about 2 weeks later as a severance package that covered a pay period 2 weeks after I moved from the state with all taxes taken out from my former state. There was ZERO wages performed or services rendered as wages on that last check. 100% of it met the definition of supplemental wages. I have tried for months to get this corrected to have the correct taxes taken out for the state where I now live. My former employer (who operates in every state in the USA) says they lost my digitally filed W-4 paperwork (even though all of my retirement paperwork and my post-retirement insurance - medical and dental - had my new address recorded) so they did not process any out of state tax request changes. They are treating the payment as if it occurred while I was still an employee. I wasn't. I retired and moved out of state prior to the period of time covered under this supplemental payment.


I know I can get this fixed when I file taxes at the end of the year, but it would be a LOT easier if my former employer just fixed it right in the first place so I don't have to jump a bunch of hoops when filing my state income taxes. Employer says they cannot adjust pay for anyone outside of the state and considers me to be living as a resident at my location on the last day of my employment, no matter what I say about not being a resident when the payment was made.


I would like to know how your case was resolved. I cannot find other examples of your scenario online. It seems to me, no one answered your question. (I think only I really understand your question, that is exactly what I did.) Examples always speak about the person living and 'working' out of state. This is a case of living, moving, retiring out of state prior to being paid the severance, and that's why I make very clear all pay received was NOT wages, but supplemental income. Which state is the supplemental income taxed in? I performed no work for the supplemental income in the former state and I no longer lived in that state. All of it was paid to me after I moved out of the state. The difference in taxes was a very significant amount (in the $1000's), so I can't just ignore it.