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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Protection from state taxation of pensions
Tax Talk

Fate of 401(k) when relocating
 

Dear Tax Talk,
I am curious about my tax-deferred 401(k) plans when I move. If I move from New York to North Carolina or South Carolina, will New York come after the taxes that were deferred while I am working here now? I can't seem to find the answer to this question anywhere.
-- Mary

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Dear Mary,
As anyone that has lived in New York knows, state and local income taxes are far reaching and expensive. If you've lived and worked in New York or any other state that imposes an income tax for that matter, your retirement accounts have been in part subsidized by the state.

The subsidy is the state tax savings you realized when you excluded the retirement contributions from taxable income. If you move prior to collecting your retirement pay, you've eroded that state's tax base. If you move to another state that imposes an income tax on retirement accounts, you're enriching that state's coffers at the expense of the other state in which you worked.

Your concerns about interstate taxation of pensions are well founded. On Jan. 10, 1996, President Clinton signed into law Public Law 104-95, which prohibits state taxation of certain pension income of nonresidents received after Dec. 31, 1995.

The law prohibits New York and other states from imposing income tax on former resident's pension income. Back then it was estimated that California will lose about $25 million and New York about $10 million annually in state income tax revenues as a result of this legislation.

Bankrate.com's corrections policy -- Posted: July 21, 2008
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