CT Separation agreement

[jeffc3]

In Feb, 2018, I signed a separation agreement that where payment was contingent on future obligations (non compete, non solicit, non disparagement, etc.)  I was NOT laid off, but initiated the separation. When I signed the agreement, I lived in NY by worked in CT.  After I signed the agreement, I NEVER worked a day in CT again.

In August 2019, I received my payment and CT is now auditing me claiming I owe them tax on the money.  Initially, they claimed it was severance, then backed off.  Then they claimed it was deferred compensation and then backed off given it was not highlighted as such on my 2019 W2 (box 12, code Z).  Obviously, I have been providing them with reasons it was not either issue.

Now they moved the Audit to another department, and I feel that they are gonna claim its severance again.

CT has NO mention of taxation of non-resident severance payments in any of the tax codes.

Any advice?

@CTTax 

[TomD8 · Accepted solution]

"CT has NO mention of taxation of non-resident severance payments in any of the tax codes."

Not so.  From CT Tax Code 12-711(b)-4, (e):

"Unemployment compensation benefits, severance payments, accrued vacation and accrued sick pay constitute income derived from or connected with Connecticut sources if they are paid in connection with personal services that were performed within Connecticut as an employee, regardless of the fact that (1) such amounts may be received in a taxable year after the year or years in which the services were performed or (2) such amounts may be paid by someone other than the employer. "

https://casetext.com/regulation/connecticut-administrative-code/title-12-taxation/income-tax/part-ii...

[Hal_Al]

I'm not a lawyer, but that sounds like severance or deferred compensation. 

Normally NY would give you a credit, or partial credit, for any tax paid to another state.   Given the time frame (more than 3 years), you may want to call the NY tax people to see if you will be able to file an amended NY return, for 2019, to claim a credit. 

[jeffc3]

Thanks for the information...very helpful.  I was not paid "in connection for personal services performed in CT."  Rather the payment was for future considerations - non solicit, non compete, etc.  The agreement specifically highlights (multiple times) that I would not get paid unless I agreed to all considerations laid forth in the agreement.  I was also led to believe that the term severance pertained to involuntary termination...perhaps that is incorrect?

[TomD8]

Investopedia (admittedly not an official source) defines severance pay this way:

"Severance pay is any form of compensation paid by an employer to an employee after employment has ended."

https://www.investopedia.com/terms/s/severancepay.asp

Fidelity Investments defines it this way:

"Severance pay is any compensation that your employer gives you when your employment there ends, beyond what you’re owed in remaining paychecks or unused time off that your company may pay out. It’s commonly offered to employees who are laid off through no fault of their own, but it is occasionally offered to other employees, including those who willingly resign."

https://www.fidelity.com/learning-center/smart-money/severance-pay#subscribe-to-smart-money