Deferred Compensation

[Earlybird]

If deferred comp from a former employer is paid over 3 years, is that income taxable in the state where earned (former work location) or where you live when receiving the payment a few years later? I believe if it is taken over 10 years or more, it is taxed in the state of residence when the payments are received, but since this is a 3 year payment, does that mean you have to file a non-resident return in the state where you used to work/live? And could it also be taxed in the state I live in now (NC vs previously GA)?

[LindaS5247]

In general, it's taxable in the state where you earned it.  The way that ‌payments are structured determines this. If the payments were made over a period of ten years or more, it would be taxable in the state in which you currently live.  

If you are living in a different state now, you will have to complete a nonresident return to report the income.

Prepare your nonresident return first in TurboTax.

How deferred compensation is taxed

Generally speaking, the tax treatment of deferred compensation is simple: Employees pay taxes on the money when they receive it, not necessarily when they earn it.

• For example, say your employer provides you $80,000 a year in salary and $20,000 a year in deferred compensation.
• You work there for 10 years, and after retiring, you get your deferred compensation in a lump sum.
• Each year you work, you'll be taxed only on $80,000 worth of income.
• The year you receive your deferred money, you'll be taxed on $200,000 in income—10 years' worth of $20,000 deferrals.

There are different ways to structure the payment of deferred income, but your options depend on the plan details as set up by the employer. The distribution schedule is almost always pre-determined and specified in the document that controls the administration of the deferred compensation plan. In other words, it's critical to understand from the beginning what your options will be down the road.

Residence can affect overall tax status

Your federal tax obligations for deferred compensation will be the same regardless of where you live when you receive the money. 

However, where you live could have a significant impact on your state tax liability—if your payments are structured the right way.

"Generally, deferred compensation is taxable in the state where the employee worked and earned the compensation, regardless of whether the employee moves after retirement," says David Walters of Palisades Hudson Financial Group in Portland, Oregon.

"However, if the employee has elected to take the deferred compensation payments over a period of 10 years or more, the deferred compensation payments are taxed in the state of residence when the payments are made." 

This can make a big difference if you move to a state that has no state income tax, such as Florida, Washington or Nevada, or at least to one with a lower income tax than where you earned the money.

Click here for strategies for managing your tax bill for deferred compensation.

Click here for how to file a nonresident state return.

[Jimterry1]

So I just received a notice from Oregon that denied my Subtraction Code 327 which was Deferred Compensation I received in 2024 from deferred salary and bonuses (Washington employer, I moved to Oregon in 2023) that were deferred between 2009 and 2012, but payments did not start until 2021 and will be paid over 5 years.  I elected to take the payments per the plan over a 5 year period, but they were delayed to start payments until 5 years after I left the company.  I left in 2016, payments started in 2021 and will completed in 2025.  Again I earned the original income in Washington, left that company in 2016 and moved to Oregon in 2023.  If I am reading your post correctly, the deferred compensation payments are over a 5 year period (the actual payments), and I treated them as not taxable in Oregon.  Washington has no state tax, so I did not pay state tax in Washington, but my understanding is that this would be an eligible Subtraction from Oregon taxable income.  Am I looking at this correctly?

[DaveF1006]

Yes. ORS 316.159 pertains to the subtraction of certain retirement distributions that were contributed to a retirement plan during a period of nonresidency in Oregon. Specifically, it allows Oregon residents to subtract distributions from their federal taxable income if:

• The contributions were made while the individual was a nonresident.
• No deduction, exclusion, or exemption for the contributions was allowed in another state before becoming an Oregon resident.
• No other state provided a tax benefit for the distributions before the individual became an Oregon resident.

If you meet the qualifications listed above, you should be eligible for the subtraction.  You may need to contact the state to seek clarification on the matter.

ORS 316.159