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State Source Tax Exclusion Law

Under the State Source Tax Exclusion Law, states are prohibited from taxing nonresidents on certain retirement income. It is up to each state to determine whether it will tax nonresidents who worked in the state and received or deferred compensation. Over 20 states do impose such a tax on nonresidents.

Under the rule, distributions from qualified retirement plans, as well as nonqualified "mirror" plans, including excess 401(k) plans and excess pension plans, may not be taxed by a nonresident state, regardless of how and when the compensation is paid. For any other NQDC plans, distributions paid when you are no longer a resident of the state may not be taxed by that state only if they are paid over your life or life expectancy, or are paid in substantially equal installments scheduled over 10 years or more.