In which state should severance be taxed if I moved to another state (from MD to CO) while receiving the severance income?

[SweetieJean]

Was the severance paid in a lump sum, or in multiple payments over time?

[MJA23]

Multiple payments over several months.

[SweetieJean]

You claim what you received while in MD on MD taxes, and what you received while in CO on CO's taxes.

[MJA23]

That's what I thought, but the MD company is saying that because I didn't perform any work for them while living in CO, the severance is taxed in the state where I "earned" the money (MD).

[torbutop1]

Do you remember how you ended up solving this? I.e. where did you pay state taxes?

[DMarkM1]

This is an old thread but likely both states (MD and CO) taxed the income with a credit for taxes paid to another state on the CO state return. 

MD rules say, for non-residents, the income is MD sourced if it is "Derived from a business, trade, profession or occupation carried on in Maryland."   

CO, like all resident states with an income tax, taxes income received while a resident in CO.  That sets up the double taxation. 

The taxpayer should have filed a part-year return for both states and allocated the income first according to where they were when they received the income, but MD also gets to tax the non-resident MD source income received while in CO (the double taxed portion). 

You can then claim a credit for taxes paid to another state on the CO resident return to mitigate the double taxation.  

[torbutop1]

That's helpful. But a more specific question then:

I worked for a company in 2020 working in Illinois. I then moved to Texas, and only received a severance as a lump sum one-time payment by the former employer in 2023, 3 years later, while residing in TX. Turbotax asks me when filing the IL taxes: "How much of the $XXX [2023 income] did you earn while working in Illinois?".

My answer intuitively is $0, because I did not earn any of that 2023 income in Illinois, as I did not live there.

Do you agree that I should put $0, or should I put the severance pay here?

Obviously, in TX I would not pay any state taxes, so the prior example of a credit between two states is not really a factor. Thank you in advance.

[AmyC]

The severance pay came from IL so my thought process is the income is IL based. Severance pay may be based on length of service and/ or salary. If the money was due to work in IL, it should have IL tax withheld and it is taxable. Not knowing where all you worked and your specific details, here are the rulings for you to verify your situation and the taxability.

Looking at page 3 of the IL instructions for who needs to file, it states:

► a nonresident, you must file Form IL-1040 and Schedule NR if you earned enough taxable income from Illinois sources to have a tax liability (i.e., your Illinois base income from Schedule NR, Step 5, Line 46, is greater than your Illinois exemption allowance on Schedule NR, Step 5, Line 50), or you want a refund of any Illinois Income Tax withheld in error. You must attach a letter of explanation from your employer.

This ruling explains when tax must be withheld and taxable income.

[cermakdonap57]

Multiple payments over 5 or 6 months.

[ThomasM125]

Rules vary by state, but in general you report the income on a tax return for the state in which it was earned, even if you are living in another state when you received it.

@cermakdonap57