Deferred compensation creates unique challenges when relocating from New York to Texas. Unlike current wages, which are taxed in the year earned, deferred comp is taxed when paid—but states have different rules about which state gets to tax it. Understanding these rules is essential to minimizing your tax liability.
What Is Deferred Compensation?
Deferred compensation includes:
- Non-qualified deferred compensation plans (NQDC)
- 409A plans
- Supplemental Executive Retirement Plans (SERPs)
- Deferred bonuses
- Phantom stock plans
- Carried interest (for fund managers)
These arrangements allow you to defer receiving compensation until a future date, typically retirement.
The Source State Problem
When you receive deferred compensation, which state gets to tax it?
- The state where you earned it (worked while it was accruing)?
- The state where you live when you receive it?
- Both?
The answer depends on the type of deferred compensation and each state’s sourcing rules.
New York’s Sourcing Rules
New York generally sources deferred compensation to the state where you were a resident when you earned it, not where you live when you receive it.
Example:
- You work in NY from 2020-2025
- You defer $500,000 in bonuses during those years
- You move to Texas in 2026
- You receive the deferred comp in 2027-2030
Result: New York will tax the full $500,000, even though you’re a Texas resident when you receive it, because you earned it while working in New York.
The “Convenience of the Employer” Rule
New York’s convenience rule complicates deferred comp for remote workers. If you:
- Work remotely from Texas
- For a NY-based employer
- For your own convenience (not employer’s requirement)
New York may argue that you’re still “working in New York” for sourcing purposes, even though you’re physically in Texas.
Qualified Plans vs. Non-Qualified Plans
Qualified plans (401(k), pensions):
- Generally taxed only by your state of residence when distributed
- New York cannot tax 401(k) distributions to non-residents
- Exception: If you were a NY resident when you made contributions, NY may tax the earnings attributable to those contributions
Non-qualified plans (NQDC, 409A):
- Sourced to the state where you earned the compensation
- New York can tax distributions to non-residents
- You may owe NY tax for years after you’ve left the state
Timing Strategies
Strategy 1: Receive Deferred Comp Before Moving
If you have control over distribution timing:
- Take distributions while still a NY resident
- Pay NY tax at your current rate
- Future distributions after moving to Texas won’t be subject to NY tax
When this works: If you’re moving soon and can accelerate distributions without penalty.
Strategy 2: Defer Until After Moving
If your deferred comp hasn’t been “earned” yet:
- Delay the earning period until after you move
- Work in Texas while the comp accrues
- Distributions will be sourced to Texas (zero state tax)
When this works: If you’re negotiating a new deferred comp arrangement or you have flexibility in when compensation is considered “earned.”
Strategy 3: Negotiate a Buyout
Some employers will buy out your deferred comp when you relocate:
- You receive a lump sum payment
- Taxed in the year received
- If received after moving to Texas, may avoid NY tax (depending on sourcing rules)
When this works: If your employer is willing to negotiate and you can structure the buyout as compensation for future services rather than past services.
The Section 409A Trap
IRC Section 409A imposes strict rules on when deferred compensation can be distributed. Violating 409A triggers:
- Immediate taxation of all deferred amounts
- 20% penalty tax
- Interest on underpayments
Don’t change distribution timing without confirming 409A compliance.
Pension and Retirement Plan Considerations
Defined benefit pensions:
- Generally taxed by your state of residence when distributed
- New York cannot tax pension payments to non-residents
- Exception: NY may tax if you were a NY resident when you accrued the benefit (this is disputed)
401(k) and IRA distributions:
- Taxed by your state of residence at distribution
- Moving to Texas before taking distributions eliminates state tax
- No allocation based on where contributions were made
Stock Appreciation Rights (SARs)
SARs are similar to stock options but settled in cash. For state tax purposes:
- Allocated based on workdays between grant and exercise
- Similar to RSU allocation
- Moving to Texas before exercise saves state tax on the spread
Carried Interest for Fund Managers
If you’re a private equity or hedge fund professional with carried interest:
- Allocation rules are complex and vary by state
- New York may source carried interest to NY if the fund is managed from NY
- Moving to Texas may not eliminate NY tax if the fund remains NY-based
Reporting Deferred Compensation
When you file your tax returns:
- Report all deferred comp on your federal return
- File NY nonresident return reporting NY-source deferred comp
- Your Texas return doesn’t tax the income (no state income tax)
- You cannot claim a credit for NY tax paid (because Texas doesn’t tax the income)
This means you’ll pay NY tax with no offset—a harsh result.
Planning Before You Move
Before relocating, review:
- All deferred compensation arrangements
- Vesting and distribution schedules
- Employer’s flexibility on timing
- 409A compliance requirements
- State sourcing rules
Our Deferred Comp Analysis
We help clients with deferred compensation planning by:
- Reviewing all deferred comp arrangements
- Calculating state tax under different scenarios
- Advising on optimal distribution timing
- Coordinating with employers on plan modifications
- Ensuring 409A compliance
- Preparing multi-state tax returns
If you have significant deferred compensation and you’re planning to relocate, contact us to model your tax exposure and explore strategies to minimize it.
