State tax implications of coronavirus-related distribution (CRD) in Massachusetts

[Anonymous]

In 2020 I took out a coronavirus-related distribution (CRD) of ~$20K from my traditional IRA. I counted 100% of the distribution toward my 2020 income (and paid all federal and state tax on it that year), which made financial sense for me because my income was lower than usual in 2020.

Now, I'm interested in repaying some of the CRD. I have a few questions:

1. The IRS website says, "...You may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received." Does this mean, if I took out the CRD on July 1, 2020, then I have until July 1, 2023 to repay it? Some of the other language on the site seems to indicate it must be repaid by 2022 (i.e., the "three years" means the 2020, 2021, and 2022 tax years).

2. I'm curious about the state tax implications of repayment. I paid MA state tax in 2020 on the full amount of the CRD. I assume that if I repay the CRD, I will also be able to file an amended MA state tax return and obtain a refund on the state tax I paid on the CRD. Is this correct?

3. Relatedly, I realized that I double-paid state tax on the CRD. Since MA does not allow income tax deductions for IRA contributions, I paid state tax on the initial contributions. Then, I paid state tax again on the distribution. Is this correct? Is there a way to avoid this double-payment?

[fanfare]

"Is there a way to avoid this double-payment?"

Yes.

 MA has a rule to adjust for this.

I forget what the rule is so I will just tell you to read the instructions for your MA state tax return.

[linear · Accepted solution]

There are two parts to this for Massachusetts.

For the CRD, see here:

https://www.mass.gov/technical-information-release/tir-20-9-massachusetts-tax-implications-of-select...

"Massachusetts gross income is federal gross income with certain modifications not relevant here. Therefore, coronavirus-related distributions will be included in Massachusetts gross income at the same time and in the same amounts as they are included in federal gross income. The exemption from the additional 10% tax under Code § 72(t) has no practical Massachusetts tax impact. Although Massachusetts conforms to the Code as currently in effect with respect to section 72, there is no Massachusetts analog to the Code § 72(t) penalty."

IRA distributions are taxable in MA when they exceed previously=taxed contributions:

https://www.mass.gov/service-details/view-non-government-pensions

"Included in your Massachusetts gross income for the year paid:

...

• Distributions from an IRA account made to you. For Massachusetts purposes however, distributions made are excluded from gross income if these distributions equal your Massachusetts previously taxed contributions. 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."

For TurboTax purposes (or if completing forms manually), you need to know how much of your distribution was previously taxed.

[jxinleblanc]

Answer to question #1:  If you took out a CRD on July 2020, you can repay it in tax years 2020, 2021 and 2022.  Also, in case you don't already know,  you have the option to spread the distribution and pay taxes over 3 years (2020, 2021 and 2022).  See answer to Q6 of the following IRS link: 

 https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

[fanfare]

Just as in  NJ,  to avoid double taxation you have to know how much you contributed to your IRAs and how much has already been taxed.

[Anonymous]

Thanks so much. This is really helpful. When I filed my 2020 taxes, I didn't realize I could exclude my previous MA contributions from the CRD when calculating gross income for MA tax purposes. I suppose I'll have to go back and amend my 2020 state tax filing.