During the Tax Year 2024, my spouse took a partial distribution amount under her 401(k) plan – at the same time satisfying her very first Required Minimum Distribution (RMD) under it. Her 401(k) plan contains some after-tax contributions that she had made during her working years. She then received a 2024 Form 1099-R, showing the gross amount of her partial distribution in Box 1 and a taxable amount in Box 2a. For 2024 federal income tax purposes, viaTurboTax, I was able to process these respective amounts accordingly. But, for 2024 state income tax purposes, I was able to recover completely the total amount of her after-tax contributions (“total cost basis”) by using the Three-Year Rule Method. As a result, going forward for future state income tax purposes only (starting with the 2025 Tax Year), the gross amount of any distribution from her 401(k) plan will be considered fully taxable. So, how should I proceed when I prepare the 2025 state income tax return using my TurboTax Deluxe software? During the steps for the federal income tax return, do I still need to access the link that gets me to the screen “Where is your distribution from?” and still select “Three-Year Rule pension or 401(k) beneefits”? Or, can I proceed to do otherwise since the cost basis has already been recovered completely for state income tax purposes in connection with Tax Year 2024? To prepare my 2025 federal income tax return, via TurboTax, I woud continue to do the same as before with regard to the gross amount and taxable amount shown in the 2025 Form 1099-R. Thank you in advance for your help in this matter.
