COVID-19 401k distribution and moved States

[Mr Bob471]

A bit of a unique situation created by the pandemic, and I’m having trouble figuring out how to pay estimated taxes as a result. I qualified to take an early withdrawal from my employer sponsored 401k because the pandemic. Since the withdrawal, I moved from NY to NJ. The withdrawal was taken while I was still a resident of NY.

Id like to pay the tax due over three years, as allowed by statute, however I’ve run into a conundrum. For state tax purposes, I imagine I will include the 1/3 portion in my part year resident return for NY. However, the way tax rules are set between NY and NJ 401k withdrawals would be taxed by NJ,  not NY after becoming a NJ resident. So - basically this year I will pay the 1/3 to NY, but if the IRS isn’t even going to consider the other 2/3 as part of my income this year, would I need to pay subsequent year taxes based on when the distribution amount is taxed (so NY for 2020 and NJ for 2021 and 2022), or would I need to find a way to pay NY in 2021 and 2022 even though there is no mechanism to do so because I am no longer a resident? 

[Petratod]

I am having the same problem in 2021 - NY to CT. Did you solve it? 

[Mr Bob471]

Yes ultimately solved, but it took a call to NY. At least the agreement between NY and NJ, and I imagine it’s the same with CT, is NY taxes your income from NY sources only. Capital gains, etc are taxed by your home state. So, it was recommended to me that wherever you lived on Jan 1 of the tax year would get the distribution tax for that year. This is because the 1/3 of your distribution is included as income each year for three years, so as far as the IRS etc is concerned you didn’t really “earn” the income until it becomes part of your income per the CARES Act changes.

So we took our distribution in June 2020, and moved a few months later into NJ. We paid our first 1/3 to NY for 2020 and paid the next 1/3 to NJ for 2021 (and our 2022 will go to NJ).  Our part year resident form for NY in 2020 listed the gain as NY income, and we did not list it on our NY non-resident return this year (we still file in NY because of a job in NY).