State Taxation of Compensation and Benefits (Portfolio 366)
At a glance
I. Background
II. The State Income Tax Base – Conformity to Federal Base
III. Residence or Domicile
IV. State Law Considerations in Securing Deferred Compensation
V. Source Taxation of Nonresidents
VI. Source Issues with Respect to Other Compensatory Payments to Nonresidents
VII. Withholding and Special Accruals
VIII. Congressional Action Under the Commerce Clause
IX. Interests in Limited Liability Companies and Partnerships
X. Constitutional Issues Relating to State Taxation
XI. Collection of Tax
Abstract
Bloomberg Tax Portfolio, State Taxation of Compensation and Benefits, No. 366, focuses on the impact of state taxation on executive and employee compensation and benefits. A state's ability to assert jurisdiction to tax individuals who earn money in connection with the performance of services is based on the individual's domicile or residence in the state, or because the individual, although a nonresident, has earned money in the state through the performance of services attributed to the state.
Federal law prohibits any state from imposing an income tax on “any retirement income” of an individual who is not a “resident” or “domiciliary” of the taxing state. The determination of an individual's residence or domicile for this purpose is made in accordance with the laws of the taxing state. Since state law rules permit more than one jurisdiction to treat an individual as resident, the possibility of multiple taxation remains. This is particularly true for individuals relocating at the time of their retirement. The application of this rule to nonqualified deferred compensation is fairly complex and, because the amounts of executive rewards can be substantial, can involve significant tax dollars.