What state do I pay taxes on for an inherited QPP (401a) death benefit & are there any exemptions?

[WonderingWhat]

I inherited a death benefit from the Teachers Retirement System in NYC when my father passed away. It is payable under the Qualified Pension Plan (QPP) – established under Section 401(a) and was distributed as a lump sum minus 10% for federal taxes. 

If I have read things properly, I think I now owe additional taxes and I hoped to find out:

1)   Do state taxes apply and if so do I have to pay taxes to NY (where the pension fund is) or to CT (where I live)?  The letter they sent says that the death benefit may be exempt from New York State and New York City income taxes but that the interest is fully taxable.

2)   If CT taxes do apply, can I use the exemption for CT teacher’s retirement or does that not apply since my father was a teacher in NY?

3)   Even though, they took out 10% federal taxes, it looks like I may still need to pay over $1,000 federal and state taxes if there are no applicable exemptions.  Will I be subject to an underpayment penalty for both?

[DDollar · Accepted solution]

You would report the income on your Connecticut tax return since you are a resident of that state.  It is not taxable by New York State, and you don't need to file a NY tax return to report it.  The CT teacher's retirement exemption would not apply because it is not your teacher's retirement plan. 

If you owe more than $1,000 you could be subject to an underpayment penalty.  However, if the amount you paid in federal tax during 2018 is 90% or more of your 2018 tax liability you want pay a penalty as long as you pay the rest of the tax by April 15.  If your 2018 adjusted gross income is $150,000 or less, and you pay 100 percent of the prior-year tax liability as current-year estimated tax payments or withholding, the safe harbor rules protect you from a penalty on your current-year underpayment. If your current-year adjusted gross income is greater than $150,000, your tax payments must equal 110 percent of the prior-year tax liability.

[WonderingWhat]

Thanks so much for your help.  Do the same rules apply to the underpayment penalty for CT??

[WonderingWhat]

Thanks so much for your help.  Do the same rules apply to the underpayment penalty for CT??