How State Tax Advocacy Helped a Former Athletics Coach Save Millions
Key Takeaways
- Separation agreements require careful review to help avoid unnecessary state income tax liabilities for high-income earners.
- State income tax on deferred compensation depends on how the payments are structured and the taxpayer’s residency at the time of payment.
- Multi-state earners benefit from proactive planning with state and local tax professionals to help ensure compliance and reduce tax exposure.
When careers cross state lines, tax rules often bring surprises — and sometimes — big ones. That was the case for a former athletics coach who came to us uncertain whether separation payments under a release agreement would be taxed by the state where he had worked. Our team’s analysis and advocacy led to a technical advice ruling that kept several million dollars in income free from state tax.
The Case at a Glance
Our client (“Taxpayer”), a coach for a sports team, had become a part‑year resident of what we’ll call “State A” while working under contract. When that contract ended, he signed a separation and release agreement. Soon after, he relocated to his home in a state with no income tax and was no longer a resident of State A.
The key question was whether the payments outlined in the agreement — intended for releasing claims and assisting with a smooth transition rather than paying for services performed in State A — would be subject to state income tax and withholding.
Our Approach
It was important to demonstrate to the state that the separation payments were not made in exchange for services that the Taxpayer performed in State A. Instead, these payments were made in exchange for releasing legal claims and assisting with a smooth transition after employment ended. Our review of state laws and past cases revealed that the payments were tied to post‑employment duties, rather than to services performed while living in the state.
Ultimately, we earned a technical advice ruling that confirmed these payments weren’t subject to State A’s income tax or withholding — saving the Taxpayer millions.
Broader Implications
Separation and deferred compensation agreements can create complex tax issues, especially for people working across multiple states. Without careful review and planning, taxpayers risk paying unnecessary state income taxes. This case demonstrates how a thoughtful approach can protect clients from similar pitfalls.
How We Can Help
At PKF O’Connor Davies, we guide clients through these complex tax rules. We help structure agreements that hold up under scrutiny and meet state-specific requirements. Our combined expertise in sports and state/entertainment and local tax matters ensures that we’re well-positioned to provide clear guidance in challenging situations.
Contact Us
If you’d like to discuss a separation or deferred compensation income scenario in any state, please contact your PKF O’Connor Davies client service team or:
Robert Raiola, CPA
Director
Sports & Entertainment
rraiola@pkfod.com | 646.699.2864
Jill Cantor, CPA, JD/LLM
Director
State and Local Tax
jcantor@pkfod.com | 203.705.4174