New Jersey challenges its residents (and their employers) by diverging in significant and meaningful ways from Federal definitions of income. In these ways, New Jersey shares much in common although not all in common) with its western neighbor, Pennsylvania. Fortunately, New Jersey has entered into a reciprocal agreement with its neighbor Pennsylvania so that a resident of one state who works in the other pays state income tax generally only to his or her state of residence and avoids double taxation on his or her income. There was no such luck for one Michelle G. Darcey, a resident of New Jersey who had the bad luck of being required to pay state income tax to both New Jersey and Pennsylvania on income from her employer’s nonqualified deferred compensation plan. My recent article in Corporate Taxation provides an in-depth look at New Jersey’s approach to taxing nonqualified deferred compensation. Employers may be surprised that the state’s approach to nonqualified deferred compensation may not follow Federal tax principles.
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