Virginia allows a subtraction for a retirement plan distribution when contributions to the retirement plan were previously taxed by another state. Please explain what one needs to do as a practical matter to include this subtraction in a nonresident return.
Here are my impressions, only, so far. Do these thoughts sound correct? I’d appreciate any corrections or additional information that would be helpful to know.
- This provision apparently allows subtraction of the full amount of retirement income received in the current tax year, up to the total amount the taxpayer contributed to the retirement plan over many years, provided these contributions were taxed in previous years by other states.
- If so, should one reduce the subtraction in a Virginia nonresident return by a partial pension plan exclusion in the current tax year by the state of residence? I did not see language requiring this in what I have read so far in Virginia's tax website. [Please see an excerpt, below.] The only test seems to be whether the contributions were taxed by other states in previous years, not whether income is currently being taxed.
- Concerning documentation needed to support this subtraction, I assume the contributions printed on the 1099-R would be sufficient to show the upper limit of the subtraction when periodic statements were not issued. Only the contributions, not earnings on contributions, are considered when determining the maximum subtraction. Also, without copies of tax returns from the distant past, I assume tax policies in public records from the state of residence would be enough to show the previous contributions were taxed by another State.
Perhaps TurboTax could consider adding language to the brief prompt for this Virginia subtraction so it will not be misleading at face value. It currently covers only "retirement plan income taxed by other states". It does not mention, for example, the role of contributions made during the life of the retirement plan, the effect of any known income earned on these contributions, or any reduction required by pension plan exclusions currently taken in other states.
Here is the excerpt from Virginia's tax website that I mentioned, above. (See the section titled “Retirement Plan Income Previously Taxed by Another State”.)
"A Virginia subtraction is allowed for individuals who receive distributions from retirement plans. The subtraction can be taken only if the individual was taxed on contributions originally made to the retirement plan in another state that were deductible from federal adjusted gross income during the same period. ... Conditions for Qualification:
-- Contributions must have been made to an IRS Qualified Plan;
-- The contributions must have been deductible for federal income tax purposes; and
-- The contributions must have been subject to income tax in another state."
See: https://www.tax.virginia.gov/subtractions#:~:text=A%20Virginia%20subtraction%20is%20allowed,income%2....
