Does Severance Pay Get Taxed Where You Worked or Where You Live?

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.

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.

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.

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.

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.