NQ Deferred Compensation was earned in Colorado while full time resident and employed there. Retired and moved to California. Received lump sum distribution for earlier years contributions. The W2 issued by the Company where was employed and who issued Deferred Compensation payment shows withholding taxes for CO even though residence is now in California. Have read many conflicting answers as to which state taxes what. But also read two states cannot tax the same income. Should the W2 be followed using the State earned in as the state that will tax the income? Or do we need to do something special, since California taxes income worldwide, which would lead to thinking they should be the primary state for taxation. Any answers to this dilemna? Thank you.
Generally, when you take a lump-sum NQDC payout, the state where the income was earned will tax that income, so CO in your case. It's true that you shouldn't be taxed twice on this income. Therefore, you will prepare a non-resident CO return and compute your CO tax. Then, you can claim a credit for taxes paid to CO on your resident CA return so that the income is not taxed by both states.
You can read more about NQDC plans here: Strategies for Managing Your Tax Bill on Deferred Compensation