• New Minnesota Law Taxing Nonresidents
  • June 15, 2008 | Author: Bruce J. McNeil
  • Law Firm: Leonard, Street and Deinard, [incorporation phrase format]Professional Association - Minneapolis Office
  • As a result of legislation signed into law by Gov. Tim Pawlenty, nonresidents of Minnesota are generally subject to state income taxes on deferred compensation and stock options earned in Minnesota and paid to those recipients. The new legislation went into effect on March 10, and it repeals the law that provided an exclusion from state income taxes for compensation paid to nonresidents who earned the compensation while they were residents in Minnesota.

    The Minnesota state income tax rules regarding compensation earned while an individual is a resident of Minnesota are, however, limited by the federal law limiting state source taxation. The new law incorporates into the law the federal law limiting state source taxation of deferred compensation. Under the federal source taxation rule, deferred compensation earned by an employee or former employee while a resident of a state, but paid when the recipient is no longer a resident of the state, is not subject to the income taxes of the state if the compensation is paid over the life of the individual or the life expectancy of the individual or is paid in installments scheduled over ten years or more, or if the compensation is paid under certain qualified retirement plans or “excess” plans.

    The new law is effective in Minnesota for amounts paid any time during 2008 and years thereafter. Accordingly, during 2008, a transition year under the regulations issued with respect to the application of Section 409A of the Internal Revenue Code, a participant in a nonqualified deferred compensation plan may want to consider changing the form of benefit payments (if paid over a period of less than ten years) to installment payments made over a period of not less than ten years.