W2 for NQ Deferred Income: Is it "Wages and Salaries" or "Other Income or Loss"

[coastielt]

While entering the W-2 info from my previous employer for installment payments of a NQ executive deferred compensation (SERP) Turbo Tax asked

Did you take money out of your nonqualified pension plan?

We just need to check whether the $XXX,635.09 in box 11 is money you contributed to your plan, or if it's money you took out of your plan.

Yes, I took this money out of my nonqualified or Section 457 plan.

No, this is money I contributed to my nonqualified or Section 457 plan.

This IS money I contributed while I was working and it also IS a monthly installment being paid out of my NQ deferred compensation plan. If I check the Yes option, the Income Summary page shows the income on the "Other Income or Loss" line. If I check the No option, the income shows on the "Wages and Salaries" line. Either way does not change my federal taxes but there must be a “correct” way to answer this question and the answer may effect my Montana state taxes. I searched here and found what seem to be conflicting answers to basically the same question:

BillM223 Employee Tax Expert

If he is receiving money quarterly from the plan, then you answer, "Yes, I took money out of this nonqualified or Section 457 plan".. ______________________________________________________________________________

DMarkM1 Employee Tax Expert

... enter your W2 exactly as shown on your form.  When you arrive at the follow on question asking "Did you take money out of a nonqualified pension plan?"  You should answer "NO" that will leave the money on line 1a and not create the schedule 1 line 8t entry. 

Which is correct?

[KrisD15]

For your situation, select "Yes, I took money out of this nonqualified or Section 457 plan".

I contacted both agents, and it seems those answers were from two different questions where there were two different situations. One answer was from tax year 2022 when the IRS changed the reporting procedure and the agent provided a "work-around" so the income wasn't double-taxed.

When funds go IN, they are NOT reported in Box 1 on your W-2 (not subject to income tax) but they are included in Box 3 and subject to FICA tax. 

When the funds are withdrawn, they are then subject to income tax, but not FICA. 

When you select "Yes, I took money out of this nonqualified or Section 457 plan"

the distribution is properly listed on Schedule 1 so that they are subject to income tax but not FICA. 

IRS LINK see page 32

[coastielt]

Thank you very much

When "Yes"  is selected, another line appears on the screen as shown below asking me to select State and enter Amount. Do I select the State where I currently live (Montana), or the State where the NQ deferred compensation was earned (Texas).

Sorry to be a pain and I really did do research to try and find this answer myself, but after reviewing federal and state instructions I really didn't understand half of what they were saying, however in more than one place they said that taxes on NQ Deferred Compensation are to be paid in the state where they were earned (the state that missed out on collecting the taxes in the first place) not necessarily the state where you currently live.

[coastielt]

This is what I found in a TaxTips article called "Strategies for Managing Your Tax Bill on Deferred Compensation"on the TurboTax website. This also seems to confirm that the taxes would be paid in the state where the deferred compensation was earned if the installment period was less than 10 years. In my case the installment period is monthly for 5 years. I was a resident of Texas when the installment payments started, but became a resident of Montana a year in. Maybe this is why the program is asking me to enter a State and Amount when Yes is selected. Still, it doesn't answer the question of which state to select in the program, Texas the state where the money was earned or my current residence of Montana.

https://turbotax.intuit.com/tax-tips/tax-payments/strategies-for-managing-your-tax-bill-on-deferred-... 

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.

[AmyC]

The article does mention that if you elect to take the deferred compensation over 10 or more years, it is taxable to your resident state. Otherwise, it is taxable to the state where it was earned.

Did you choose to have the compensation spread over 10+ years? 

• Yes, resident state, Montana. 
• No, Texas.

[coastielt]

Thanks Amy. The installments are paid over a 5 year period, so if I understand you correctly I should select Texas as the state.