Massachusetts Taxable IRA distributions

[ScruffyCurmudgeon]

Massachusetts does not make a distinction between Traditional IRAs and SEP-IRAs in regard to the tax liability amount on distributions.  Please see the following and the attachment

• "Massachusetts Reporting IRA & SEP-IREA Distributions" showing how to enter the data and the effect on the MA Form 1 tax forms. 

The summary of what follows is that a distribution from any IRA is taxable in MA to the extent that the monies were not taxed at the time of contribution.  Similarly to Federal rules, the assumption is made that distributions are first from taxed contributions and then when previous contributions (the "Basis") are exhausted, then the balance is assumed to be not previously taxed and liable for taxation.

Traditional Individual Retirement Account (IRA)

Traditional Individual Retirement Accounts (IRA) are retirement plans you can contribute a maximum annual amount to. For joint filers, each may contribute up to the maximum allowed amount. Earnings accumulate tax-free on IRA contributions but income distributions may be taxable.  Unlike Federal taxation, Massachusetts does not allow a deduction for these contributions.

Excluded Distributions from Traditional IRA from your Massachusetts gross income for the year paid:

• Income you earned on the contributions while in the IRA account
• Similarly, for federal purposes, distributions are excluded from gross income to the extent that they represent contributions for which no deduction was allowed due to federal laws pertaining to deductibility of contributions.
• Distributions from traditional and Roth IRAs to qualified charities. This applies to:
  • Distributions made on behalf of taxpayers at least 70½ on the distribution date
  • Distributions made up to $100,000 per year

Excluded  Distributions from SEP-IRA from your Massachusetts gross income for the year paid:

• Contributions your employer made to your SEP (These were previously taxed!) 
• Income you earned on the contributions while in the SEP account
• Distributions the SEP made to you, if these distributions equal your Massachusetts previously taxed contributions. Distributions in excess of Massachusetts previously taxed contributions before January 1, 1988 are taxable.

For ALL IRAs, keep a record of all contributions you made that you included in Massachusetts gross income. Records include:

• Statements from banks or other financial institutions verifying contributions and distributions to date, including any rollover sources
• Copies of U.S. Form 1099-R - Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts
• Federal Forms 8606 - Nondeductible IRAs

Simplified Employee Pension (SEP or SEP IRA) plan

Simplified employee pension plans (SEPs) are IRA-type plans employers set up so they can contribute to IRAs on their employees' behalf. These plans let employees contribute more money to their IRAs than allowed under traditional IRA rules. 

[chriscross]

Thanks. I can’t find any attachment. Based on your reply, assuming I would combine (pool) the contributions made to both his sep and traditional IRAs, as well as combine yearly distributions, even though these are  unequal. This whole aspect of the tax code is so vague and complicated. My husband was self-employed, so that really complicates what was taxed in the past. And I only have records dating back to 2004, since no one, including our accountant and financial planner advised us to hold onto them. It hardly seems worth it to jump through all these hoops, but I’m sure it would add up over the years to get these tax breaks now that we’re in retirement. Both of us contributed the maximum allowable amount every year beginning in the nineties. Any further advice? 

[chriscross]

I had to sign in to get the attachment. It’s extremely helpful! Where can I find the smart worksheet? I am using the online filing software. It doesn’t provide any forms or worksheets I can see. 

[ScruffyCurmudgeon]

As to the "Attachment" see the image of a link below the text of the answer.

As to preventing paying taxes on already taxed contributions (made with post-tax monies - typical given MA treatment of IRAs), it is really important to keep a running record of the total amount.  Luckily, TurboTax started doing this in the filing process a few years ago, so if you report the total pre-tax contributions and then year-by-year report the distributions, it does the job.  However, as to prior to that, unfortunately you can either take a "Best" guess that is "Reasonable" or else forego that and pay on monies already taxed

[ScruffyCurmudgeon]

Seeing the Forms in what is called "Forms Mode" is only available in the Desktop software products and not in the online system until you pay/print /file.

If these posted responses were helpful, please click on the thumbs up icons on the bottom of each posting.

[chriscross]

If I purchase the desktop software, can I still file electronically and save all the returns, etc.  in the cloud?

After paying/print/file with the online software, will I be able to view, save and print all the forms and worksheets? Will they be available in the future?

Your replies are very much appreciated!

[ScruffyCurmudgeon]

If you want to want to change from using Online TurboTax (where you are using a browser and not installed software on your computer)

1. Sign in to your TurboTax Online account and open or continue your return
2. Select Tax Tools and then Tools from the left menu
3. In the Tools Center pop-up, select Save your 2022 return to your computer
4. The file will download with the name taxReturn.tax2022
5. (Optional) Locate the downloaded file and change the default filename to something more recognizable, for example JohnDoeTaxReturn.tax2022 (just make sure you don't change the filename extension to the right of the dot)

Your online return is now saved in a format can be opened in the TurboTax software.

[ScruffyCurmudgeon]

The Desktop Software offers free Federal eFile but unlike Online, requires a payment (typically $25) to eFile hte Sate return.
Desktop does not limit how many different filings are made: Example, one for a married couple in a household, one for each child residing in the household who must on their own file a tax return.

[ScruffyCurmudgeon]

Online TurboTax retains your tax filing and you can return, enter your login, and retrieve your tax return and print it.   Duration of retention - unclear but it seems that Online TurboTax retains at least the last 3 years which is the typical "Lookback" period during which you could Amend a prior year return, or respond to IRS inquiries.

Desktop Software does not access TurboTax's Online Cloud Storage so it is the user's responsibility to store BOTH the ".2022.TAX"  (or relevant year) file and also the printed return in PDF format.  Consider using free cloud storage such as Google Drive, M/S OneDrive, or Apple iCloud.

[chriscross]

You've been very helpful, scruffy. And not a curmudgeon at all. 🙂

I got the desktop software which is a much better option for me.

Have a great day!

[tulin20m]

@ScruffyCurmudgeon  Thank you! This Q&A is very helpful. I have a similar question but in my case the IRA is an inherited IRA. I have not made any contributions to it and as I am under 65 but my deceased uncle whose account it was would be over 65, I take out the minimum required every year. I don't remember having encountered this question on taxes before; I have had to take out this minimum amount since about 2015, and have lived in MA for 7 years. Do I enter the total of the amounts I withdrew since moving to MA? Or do I enter nothing as I have contributed nothing? Or do I enter the small amounts I have contributed to my own separate employer-sponsored 403(b)s? I do not think I have any IRAs.

PS - obviously doing my taxes late... filed an extension, don't worry 😛

[ScruffyCurmudgeon]

Massachusetts taxation of distributions from deferred income accounts (IRAs and similar) is different from both Federal rules of taxation and almost all states.   Massachusetts recognizes that a contribution into the account may well have been taxed in the year that the contribution to the account was made if the source was income earned in Massachusetts and so subject at the year to tax.  This would be the typical case of a Massachusetts taxpayer filing Form 1 or a part-time taxpayer filing -Form 1-NR/PY.  In that specific case, given the prior Massachusetts taxes taken, the Dept. of Revenue deems all distributions taken out to be non-taxable until and up to the point that the Basis (all monies having been contributed while subject to prior tax) is exhausted.  Then following distributions become taxable.  With the Basis exhausted, distributions going forward are taxable.

In a quirk of the regulation, in your case the distributions will be taxable as no Massachusetts tax was even imposed, even given the non-residential status of the IRA account.

Included in your Massachusetts gross income for the year paid:

• Distributions from an IRA account made to you.  If you're a Massachusetts resident but also a beneficiary of a non-Massachusetts IRA, the entire IRA distribution is taxable since no Massachusetts tax was ever paid on the contributed income.

[Garry_NewEngland]

How do I enter a distribution from an IRA, in Massachusetts, where:

-taxes were paid on the amount deposited

-the tax basis is not exhausted.

I don't see how to get the MA state return to adjust for that, and the tax on those IRA distributions is being added to the tax due.

[ScruffyCurmudgeon]

@Garry_NewEngland 

Unfortunately, this "thread" of conversation continues too many different responder to an original question and the discussions address more than one issue.

Please scroll down to the posting dated ‎04-03-2023 10:12 AM which describes how to address your situation and contains as an attachment which may be viewed, printed or downloaded that provides exactly the additional form that must be generated from the necessary additional entries in the Massachusetts interview and also in sequence of nine (9) steps walks you through what entries you must make of your own data.
The attachment was uploaded on that date: ‎04-03-2023 10:12 AM  to Intuit's server and is still available.

If you find either this response or the earlier response please do click on the 👍 to indicate you were helped.

[tulin20m]

Wow, this is so helpful, thank you so much. I will review and may have an additional question.