Deferred Compensation

[Chieffan4ever]

I have a deferred compensation plan that was designated to be paid out over a 10 year period. I received the first payout in 2021 while a resident of California. I moved from California to a tax free state (Tennessee) in 2022. The W-2 I received from my former employer in 2022 continued to have California state tax withheld despite the fact that I had moved prior to the distribution. My question is two-fold: 1) Given that I originally elected a 10 -year payout period, is the income still taxable in California since I initiated the payouts back in 2021 while a resident of California or are the payouts considered tax free for the remaining 9 year payout period after my move to Tennessee?  2) How can I make a correction in Turbo Tax to remove it as taxable income on my 2022 California non-resident tax return?

[hbl3973]

According to CA FTB publication https://www.ftb.ca.gov/forms/2018/18_1005.pdf  your type of deferred compensation is not taxable to nonresidents.  As to your second question,  it is straightforward to do in a Desktop version of TurboTax using the Forms View to adjust the numbers directly.  I haven't used the online version, which doesn't have Forms View, but perhaps you can change or remove the CA state of origin where you have entered the deferred compensation information.

[ErnieS0]

If you have a deferred comp plan that is not taxable to a non-resident, you can change your California income to $0 on your nonresident return and get back your withholding.

I suggest double-checking with your former employer first before making any changes.

California does not tax a private deferred compensation plan program or arrangement described in IRC Section 3121(v)(2)(C) only if the income is either of the following:

1. Part of a series of substantially equal periodic payments (not less frequently than annually) made over the life or life expectancy of the participant or those of the participant and the designated beneficiary or a period of not less than 10 years.

2. A payment received after termination of employment under a plan program or arrangement maintained solely to provide retirement benefits for employees in excess of the limitations on contributions or benefits imposed by the IRC.

See page 6 of FTB Publication 1005.

To adjust your California, you will see a section for “Nonresident Adjustments.”

On the screen “Did you earn all of your income in California?” select No, I earned all or some of the $xxx in a different state.

In the box How much of the $xxx from federal Form(s) W-2 did you earn in California? Change the number to $0. Your California refund will equal your withholding.