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Division of Taxation

Deferred Compensation Received by Nonresident Hedge Fund Managers Under IRC §457A

Hedge fund managers who deferred compensation into accounts in offshore banks under IRC section 457A must report and pay tax on this deferred compensation income for federal income tax purposes in 2017. If the deferred income was sourced to New Jersey at the time it was earned, it also is reportable and taxable on the nonresident  Gross Income Tax return (Form NJ-1040NR) in the same year as for federal.

Income earned in New Jersey is subject to Gross Income Tax, regardless of the residency of the taxpayer when the income is reported. This includes deferred income that is earned in one period, then reported and taxed in a later one. New Jersey considers nonresident hedge fund managers receiving such deferred income as subject to the Gross Income Tax in accordance with N.J.S.A. 54A:5-8a(2). In addition, N.J.S.A. 54A:8-3(c) requires that income must be reported to New Jersey at the same time that it is reportable for federal income tax purposes.

Therefore, hedge fund managers must source compensation deferred under IRC Section 457A to this State if it was attributable to New Jersey at the time it was earned and deferred. They must report this income for New Jersey income tax purposes in the same tax year as it is reported for federal income tax purposes.

Last Updated: Thursday, 02/20/20