If a New Jersey resident enrolled in a long-term disability plan while working in New York, are the disability benefits he now receives New York source income subject to New York State personal income tax?

Plain-English summary

Petitioner was a New Jersey resident who worked for a multinational corporation in New York City from 1998 until March 2010, aside from an overseas assignment from June 2007 to September 2008. In March 2010 he suffered a stroke that left him with visual, cognitive, and motor impairments and unable to return to work. He first collected six months of short-term disability benefits from his employer, which were treated as New York source income on his New York returns. He then became eligible for long-term disability benefits under a noncontributory disability insurance policy - one his employer paid all the premiums for - that he had enrolled in on January 1, 2009 while actively working in New York. He asked whether those long-term disability benefits, received in 2011 and potentially through January 2016, are New York source income subject to New York State personal income tax.

The Department concluded that the long-term disability benefits are New York source income, because Petitioner enrolled in the disability plan while he was actively working for his employer in New York State. Under Tax Law § 631(a) and the related regulations, a nonresident's New York source income includes compensation for personal services performed in New York, and that character carries over even if the compensation (here, disability benefits tied to the New York employment) is received in a later tax year.

Whether the benefits are actually taxed, however, turns on a second question: whether they are included in Petitioner's federal adjusted gross income (FAGI). Under IRC § 104(a)(3), disability benefits paid under a noncontributory employer-paid policy are excluded from federal gross income unless the premiums the employer paid on the employee's behalf were not includible in the employee's own gross income when paid. Petitioner's facts didn't specify whether his employer's premium payments were included in his gross income. The Department explained that if those premiums were not includible in Petitioner's federal gross income, then the long-term disability benefits he receives will be includible in his federal gross income, flow into his FAGI and NYAGI, and be subject to New York State personal income tax.

What this means for you

Nonresidents receiving disability benefits tied to New York work

If you enrolled in an employer disability plan while actively working in New York, benefits you later collect under that plan are New York source income - even if you are a nonresident and even if you receive the benefits in a year after you stopped working. The source of the income is fixed by where you worked when you enrolled and were covered, not by where you live when you receive the checks.

Determining whether the benefits are actually taxable

New York source income is only taxed to the extent it is included in your federal adjusted gross income. For a noncontributory disability policy paid for entirely by your employer, check whether your employer's premium payments were included in your gross income when paid. If they were not, the benefits you later collect will be included in your federal gross income (and therefore your FAGI and NYAGI) and will be subject to New York tax; if the premiums were already taxed to you, the benefit payments themselves generally are not.

Common questions

Q: Petitioner is a New Jersey resident and hasn't worked in New York in years. Why would his disability benefits still be New York source income?
A: Because he enrolled in and was covered by the long-term disability policy while he was actively working in New York. New York source income for compensation-type payments is determined by where the underlying services were performed, regardless of when - or where the recipient lives when - the payments are actually received.

Q: Does that mean the benefits are automatically taxed by New York?
A: No. Being "New York source income" is only the first step. The benefits are taxed only if and to the extent they are included in Petitioner's federal adjusted gross income.

Q: When are noncontributory disability benefits included in federal gross income?
A: Under IRC § 104(a)(3) and IRS Rev. Rul. 2004-55, such benefits are included in federal gross income if the employer's premium payments on the employee's behalf were not includible in the employee's gross income when paid. Petitioner's facts did not specify whether that was the case for his employer's premiums.

Q: How long could Petitioner keep receiving these long-term disability benefits?
A: Under the facts described, if he remained unable to return to work, he could collect benefits under the disability policy until January 2016, after which he would become eligible for full corporate and Social Security retirement benefits.

Citations and references

• Tax Law § 631(a) - defines a nonresident's New York source income as items of income, gain, loss, and deduction derived from or connected with New York sources that enter into FAGI
• Tax Law § 612(b) and § 612(c) - addition and subtraction modifications relating to income derived from New York sources
• 20 NYCRR § 132.1(b) - modifications applicable to a nonresident's FAGI for New York source income purposes
• 20 NYCRR § 132.4(a) - NYAGI includes items attributable to a business, trade, profession, or occupation carried on in New York State
• 20 NYCRR § 132.4(b) - compensation for personal services rendered in New York State is New York source income if included in FAGI
• 20 NYCRR § 132.4(c) - compensation for New York services is New York source income regardless of the taxable year in which it is received
• IRC § 104(a)(3) - excludes certain disability benefits from federal gross income unless attributable to employer premium payments not includible in the employee's gross income
• IRS Rev. Rul. 2004-55 - federal guidance on the taxability of noncontributory disability benefits based on premium treatment

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a13_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(9)I
Income Tax
September 10, 2013

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I120821A

The Department of Taxation and Finance received a Petition for Advisory Opinion from name
and address redacted. Petitioner, a New Jersey resident who was employed in New York State at the
time of his disability, asks whether the long-term disability benefits he received in 2011 (and will be
eligible to receive in subsequent years) are New York source income subject to New York State
personal income taxes.
We conclude that Petitioner’s long-term disability benefits are New York source income, and
they will be subject to New York State personal income taxes if they are included in his federal
adjusted gross income (FAGI) .
Facts
At all times relevant to this opinion, Petitioner was a resident of New Jersey. From 1998 until
March 2010, Petitioner worked for a corporation (Corporation) that had locations throughout the
world, including New York City. Except for June 2007 through September 2008 when he was
assigned abroad by his employer, Petitioner worked for Corporation in New York City. In March
2010, Petitioner suffered a stroke that resulted in visual, cognitive, and motor skill impairments to
Petitioner and prevented his returning to work. Following the stroke, Petitioner collected short-term
disability benefits from Corporation for six months. The benefits were treated on Petitioner’s
New York State income tax returns as New York source income. After the term of benefits under
Corporation’s short-term disability plan elapsed, Petitioner was eligible for and collected long-term
disability benefits under a noncontributory disability insurance policy, which was certified on January
1, 2009. All the active full-time employees of Corporation were eligible to enroll in the policy plan
when they were actively at work, and Petitioner enrolled while he was employed and actively working
in New York State. Corporation paid all of the premiums for its employees who were covered by the
long-term disability policy. If Petitioner is unable to return to work because of his impairments, he
will be able to collect long-term disability benefits under the disability policy until January 2016.
Thereafter, Petitioner will be eligible to collect full Corporation and Social Security retirement
benefits.
Analysis
Petitioner asks whether the long-term disability benefits he received (and will be eligible to
receive in subsequent years) under a noncontributory insurance policy are New York source income
subject to New York State personal income taxes.
Generally, a nonresident of New York is subject to New York State personal income tax on his
New York source income - defined as the sum of income, gain, loss, and deduction derived from or

-2-

TSB-A-13(9)I
Income Tax
September 10, 2013

connected with New York sources - that enters into his FAGI. See Tax Law § 631(a). The FAGI of a
nonresident individual may be subject to the addition and subtraction modifications in Tax Law §§
612(b) and 612(c), respectively, that relate to income derived from New York sources. See 20
NYCRR § 132.1(b).
The New York adjusted gross income (NYAGI) of a nonresident individual includes items of
income, gain, loss and deduction entering into his FAGI that are attributable to a business, trade,
profession or occupation carried on in New York State. See 20 NYCRR § 132.4(a). NYAGI includes
compensation paid to a nonresident individual for personal services rendered within New York State if
the compensation is included in the individual’s FAGI. See 20 NYCRR § 132.4(b). If personal
services are performed in New York State, the compensation for such services includible in FAGI
constitutes New York source income, regardless of whether the compensation is received in a taxable
year after the year in which the services were performed. See 20 NYCRR § 132.4(c). Thus,
Petitioner’s question has two elements: (1) whether the long-term disability payments are New York
source income, and (2) if so, whether they will be subject to New York State personal income tax.
Petitioner enrolled in a long-term disability benefit plan when he was actively working for
Corporation in New York. As such, the disability benefits are New York source income and they will
be taxable income to Petitioner to the extent such benefits are included in his FAGI.
Generally, such disability benefits paid to an employee pursuant to such noncontributory
insurance policy will not be included in an employee’s federal gross income (and consequently an
employee’s FAGI) unless the amounts are attributable to contributions by the employer which were not
includible in the gross income of the employee or were paid by the employer. See IRC § 104(a)(3);
IRS Rev. Rul. 2004-55. Corporation paid all the premiums on Petitioner’s behalf, but Petitioner’s facts
do not state whether or not the premium payments made by Corporation were includible in Petitioner’s
federal gross income. If the premium payments made by Corporation were not includible in
Petitioner’s federal gross income, then the amounts received for benefits under the noncontributory
insurance policy will be included in Petitioner’s federal gross income and flow through to his NYAGI,
and as such, will be subject to New York State personal income taxes.

DATED: September 10, 2013

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts
set forth therein and is binding on the Department only with respect to the person or entity
to whom it is issued and only if the person or entity fully and accurately describes all
relevant facts. An Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific time period at issue
in the Opinion. The information provided in this document does not cover every situation
and is not intended to replace the law or change its meaning.