by Catherine A. Walsh, CPA, MBT

On March 7, 2008, a new bill, signed by Governor Pawlenty, will change the way Minnesota taxes deferred compensation for former residents. 
 
Effective January 1, 2008, Minnesota will now defer tax compensation for former residents. Common forms of deferred compensation include nonqualified deferred compensation, severance or salary continuation payments, and income that arises on exercise of nonqualified stock options. 
 
Under the prior law, if an individual was an employee in Minnesota and later changed residency to another state, Minnesota did not tax the employee on deferred compensation if he or she had been a resident of Minnesota when he or she performed the service that earned the income and he or she was not a resident of Minnesota for any portion of the year in which the deferred compensation was received. 
 
The new law also requires employers to withhold taxes on payments that are subject to Minnesota tax under the new rule, but only on payments made after April 1, 2008.
 
The new law does not apply to items Minnesota may not tax due to the State Income Taxation of Pension Act. Amounts covered under this law include payments from a qualified retirement plan; payments received under a nonqualified plan if the payment is part of a series of substantially equal periodic payments made no less frequently than annually for a period of no fewer than ten years; or payments received under an “excess” plan to provide benefits in excess of the 401(a) 17, 402 (g) and 415; and certain other limitations.