State Taxation of Compensation and Benefits focuses on the impact of state taxation on executive and employee compensation. A state's ability to assert jurisdiction to tax individuals that earn money in connection with the performance of services is based either because the individual's domicile or residence is in the state, or because the individual, although a nonresident, has earned money in the state through the performance of services attributed to the state. Because there has been a significant increase in the multistate activities of key executives, the scope of source taxation of nonresidents has increased. This Portfolio, written by Richard Reichler, Esq., of Meltzer, Lippe, Goldstein & Schlissel, P.C., covers the following topics related to state taxation of compensation and benefits:
In addition, this Portfolio delves into the background of P.L. 104-95, which was imposed by Congress to limit state income taxation of certain pension income. It also explains how to navigate and apply the new and complex law rules to nonqualified deferred compensation. The Worksheets include a chart comparing state residency requirements.
State Taxation of Compensation and Benefits allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Background
A. Introduction
B. State Taxing Authority In General
1. Nexus
2. Residence/Domicile
3. Funding in Trusts
4. Allocation of Income
5. Federal Limitations
II. The State Income Tax Base – Conformity to Federal Base
A. General Rule
B. Other Conformity Issues
1. Joint Returns
2. Determination of Income
3. Determination of Tax Rate
C. Tax Credits
D. Exemptions
E. Itemized and Standard Deductions
III. Residence or Domicile
A. In General
B. State Definitions of “Resident”
1. In General
2. Domicile
3. New York Audit Guidelines
C. Changing to a Foreign Domicile
D. Statutory Nonresidents
E. Statutory Residents
F. Residence Controversies
G. Areas of Practitioner Concern
H. Relief from Multiple Taxation
2. Constitutionality of Taxation of the Entire Income of a Statutory Resident
3. Taxation in the Case of a Change in Residence
4. Income Earned Before, But Received After a Change of Residence
5. Change of Residence and the Accrual of Income
6. Determination of Income Accruing In Connection with a Change in Residence
7. The Economic Benefit Doctrine
IV. State Law Considerations in Securing Deferred Compensation
1. Contract Protections Used in Pay–As–You–Go Arrangements
2. Creditor Rights and Employer Security
a. Present Creditors
b. Potential Subsequent Creditors
c. Bankruptcy
3. Funding Deferred Obligations
a. Rabbi Trusts
b. Secular Trusts
B. Impact of State Law Priorities on Funded Plans
C. Foreign Trusts
D. ERISA Coverage and Funding
E. State Income Tax Treatment of Non–Qualified Trust Income
F. State Taxation of Undistributed Subchapter J Earnings
V. Source Taxation of Nonresidents
A. Allocation of Business Income Generally
B. Allocation of Employee Source Income
C. Employee v. Independent Contractor
D. Allocation of Nonresident Employee Source Compensation
E. Source Allocation Rules Applicable to Compensatory Payments
1. Deferred Compensation
2. Stock Options
3. Inconsistent Allocation Rules
4. Ballplayers and Artists – Special Rules
F. Income from Intangible Property Not Source Income
G. Deemed Intangibles
H. Intangible v. Source Income
I. Appreciation in Nonresident Compensatory Income – Intangible Income or Compensatory Income
1. Exposition of the Issue
2. Precedents with Respect to the Issue
VI. Source Issues with Respect to Other Compensatory Payments to Nonresidents
A. Bonus Payments
B. Severance Payments
C. Phantom Stock Plans
D. Non–Statutory Stock Options – What About the Bells and Whistles?
VII. Withholding and Special Accruals
VIII. Congressional Action Under the Commerce Clause
Introductory Material
A. Public Law No. 86-272
B. Public Law No. 104-95
2. Committee Report
3. “Retirement Income” Described
4. Tax-Deferred Funding Vehicles Listed in Public Law No. 104-95
a. Qualified Plans Under I.R.C. 401(a) that are Exempt Under 501(a)
b. Simplified Employee Pensions Under I.R.C. 408(k)
c. Annuity Contract Plans Under I.R.C. 403(a)
d. Annuity Contract Plans Under I.R.C. 403(b)
e. Individual Retirement Plans Under I.R.C. 7701(a)(37)
f. Deferred Compensation Plans Under I.R.C. 457
g. Governmental Plans Under I.R.C. 414(d)
h. Trusts Under I.R.C. 501(c)(18)
i. I.R.C. 3121(v)(2) Payments
(1) In General
(2) Section 3121(v)(2)
(3) Stock Option Bells and Whistles
(4) Exclusion of Severance and Other Welfare Benefits
(5) When a Plan is Established
(6) Time and Rate of Payment
(7) Ratable Payment
(8) Excess Benefit Plans
5. Constitutionality of Pub. L. No. 104-95
IX. Interests in Limited Liability Companies and Partnerships
X. Constitutional Issues Relating to State Taxation
B. Equal Protection
C. Privileges and Immunities
D. Due Process Clause
E. Commerce Clause
F. Taxes Discriminating Against the Federal Government
XI. Collection of Tax
B. Minimum State Contacts to Establish a Withholding Obligation
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 State of New York - Department of Taxation and Finance Income Tax - District Office Audit Manual Nonresident Allocation 5/4/98
Worksheet 2 [Reserved.]
Worksheet 3 Reserved
Worksheet 4 Pub. L. No. 104-95
Worksheet 5 H.R. No. 104-389 (Dec. 7, 1995) - Committee Report To Accompany Pub. L. No. 104-95
Worksheet 6 State Comparison Chart Taxation of Deferrals to 401(k) Plans
Worksheet 7 State-by-State Residency Requirements
Bibliography
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