If you live in the same state where you work, that's the government that gets your state income tax. If you live in one state and work in another, you may have to pay tax in both and claim a tax credit in one. The same may be true if you receive severance from an out-of-state job, but there's greater disparity in how states treat taxes on severance pay.
The issue of where your severance pay will be taxed will be directly influenced by the state in question. For example, Georgia does not tax resident or nonresident severance pay, while the state of New York chooses to tax both under certain circumstances.
Assessing Out-of-State Pay
States that levy an income tax on residents tax their income no matter where it was earned. If you live in Delaware and work in Maryland, for example, you pay tax to Delaware on your Maryland income. As you're earning money in Maryland, you also pay state income tax there. Rather than double-tax you, states offer tax credits for what you pay other jurisdictions: If you pay $500 in tax to Maryland, Delaware will let you claim a $500 tax credit.
Exploring Severance Pay
Some states do not tax severance pay at all, or at least not nonresident severance pay. Georgia, for example, taxes income nonresidents earn for work in the state, but doesn't consider severance to be pay for work. Therefore, there's no tax. New York state, on the other hand, does tax nonresident severance pay if it accrues over time. If you earn one week of severance pay for each year you work in New York, the state will tax that income when you collect it.
Researching Other Rules
The tax situation for your severance pay may vary with the amount. For instance, in North Carolina, severance isn't taxable until it tops $35,000. A military life can also be a factor. Military members and spouses who call one state home but have to live in another only pay taxes to their home state. If the spouse earns income, or the military member has a second job, any severance they receive would be taxed in the official state of residence.
Additional Important Considerations
Which state you officially call home is often more a matter of law than personal preference. New York law, for example, regards you as a resident if you have a "permanent domicile" in the state. A New York homeowner who leaves the state for college or for business overseas is still legally a state resident. If your permanent domicile is outside the state but you have a home in New York, and spent 184 or more days there during the year, New York would also count you as a resident.
- State of Delaware: PIT FAQs
- North Carolina Department of Revenue: Directive PD-98-1
- Military.com: Tax Tips for Military Spouses
- New York State Department of Taxation and Finance: Publication 36
- U.S. Department of Labor. "Severance Pay." Accessed Aug. 16, 2020.
- U.S. Department of Labor. "Wages and the Fair Labor Standards Act." Accessed Aug. 16, 2020.
- NBC News. "While Sears executives get $25 million in bonuses, laid-off workers struggle during Christmastime." Accessed Aug. 16, 2020.
- New York State Department of Labor. "Dismissal or Severance Pay and Your Unemployment Insurance Benefit." Accessed Aug. 16, 2020.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.