I. Paid to a resident of New York at time of distribution:

A. Fully taxable, except if -

1. Received when 59 1/2 or older, the first $20,000 of each year's distribution is exempt from tax (except if paid to an officer or employee of Federal or New York State government - then, depending on whether employer or employee made the contribution, may be entirely exempt).

2. Exclusion of $20,000 applies to periodic payments attributable to personal service performed prior to retirement as employee, arising from employer-employee relationship or from contributions to a deductible plan for Federal income tax purposes.

a. Periodic Payments (i.e., payable not less than annually over a term no less than 1/2 the individual's life expectancy when payments begin) from IRAs and qualified and nonqualified plans.

3. a. Exclusion also applies to lump-sum payments from IRAs and qualified self-employed (e.g., Keogh) retirement plans.

b. Exclusion is not available for lump-sum payments to former employees from qualified or nonqualified plans. (However, averaging provisions apply.)

4. The exclusion is applicable to New York City personal income tax, but not to the New York City nonresident earnings tax.

5. The exclusion applies to a beneficiary recipient, if otherwise available to the deceased.

II. Paid to a Nonresident of New York at time of distribution:

A. Taxable to extent attributable to services rendered in New York, except -

1. Taxable portion is reduced by $20,000, if received when 59 1/2 or older. (Similar to $20,000 exclusion rules for residents.)

2. Nontaxable, if qualifies as an employer-provided annuity.

a. To be an "annuity," it must, among other requirements, be paid (i) in money, (ii) annually, over a period of at least one-half of the recipient's life expectancy, and (iii) pursuant to a plan established and maintained by the employer.

b. However, the "annuity" exception does not apply to IRA or Keogh plan distributions.

Thus, if you plan to receive retirement benefits in the form of an annuity, then payment of the benefit by the plan itself should be considered (in lieu of a rollover to an IRA and then annuity payments from the IRA).

B. In determining the taxable portion of a distribution, if services were performed entirely within New York, the entire payment is New York source taxable income.

1. Conversely, if services were performed entirely outside New York, then no portion of the distribution is taxable.

2. Where services are performed partly within and without New York, the portion determined to be New York source income is determined by a fraction, the numerator of which is the compensation for services rendered in New York in the current and three immediately preceding years (or longer period of service, if capable of being established and proven) and the denominator of which is the total compensation received for services performed within and without New York.

a. Note: If the taxpayer earned compensation while a resident, but receives the retirement benefit when a nonresident, rules similar to those above apply in allocating compensation within and without New York (i.e., based upon services rendered within and without New York).

b. Part-year residents, who receive a lump-sum distribution, are required to allocate to the portion of the year prior to the change in status the total portion of any lump-sum distribution that accrued prior to the change. The resident status of the taxpayer when the funds are received is not relevant.

The effect of such a requirement is that if a taxpayer changes from resident to nonresident status, he or she must treat a lump-sum distribution that accrued during the resident period as if he or she had not changed residence (i.e., no allocation between New York and non-New York sources). The same is true for a change from nonresident to resident status.

III. Separate Tax on Lump-Sum Distributions:

A. Note: Not considering herein the special rules relating to the long- term capital gain portion which may be included in lump-sum distributions in certain cases.

B. New York adopts the Federal five-year forward averaging rules for purposes of computing the separate tax on lump-sum distributions.

C. In the case of nonresidents, if the lump-sum distribution is wholly or partly derived from New York sources, the amount of tax is computed in the same manner as the separate tax computation for a resident.

Thus, the qualified lump-sum distribution is wholly derived from New York sources if services were wholly performed within New York. If only derived in part from New York sources, the taxable amount must be allocated within and without New York.

The qualified lump-sum distribution is wholly derived from, or connected with, New York sources if the nonresident performed services entirely within New York as an employee, sole proprietor, or partner.

D. Where the special lump-sum averaging rule is availed of, there is no $20,000 exclusion allowed.