Iowa - Spreading CRD income over a three-year period.

Forum|Forum|5 years ago
February 26, 2021
1 reply
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Does anyone know if Iowa has conformed with Fed for allowing a Coronavirus Related Distribution to be included in income over a three-year period? I am entering my info into Turbo Tax online and it appears to be calculated correctly using the three-year period for Fed but for my IA return it appears to be including it as a lump sum only. Is this correct or is there a Turbo Tax update required to properly align the state returns with the Fed return? Thanks for any help you can offer.

TurboTax Deluxe Online

KathrynG3

Level 14

It depends. Be sure you have answered the questions in the 1099-R federal interview to defer the tax on the income. There is nothing in the expanded instructions allowing for the income received to be deferred for an early distribution of retirement accounts.

TurboTax will automatically calculate certain aspects of the return and otherwise, ask more questions in the state interview. There are aspects that Iowa does not conform to federal law.

The 2020 Iowa Form IA 1040 Expanded Instructions page 3 only state: For tax years beginning on or after January 1, 2020, Iowa has adopted rolling conformity, meaning the state will automatically conform to any changes made to the Internal Revenue Code (IRC), except as specified by Iowa law.

See: Iowa Nonconformity: Coronavirus Aid, Relief, and Economic Security Act of 2020 which states:

Iowa generally conforms with tax provisions of the CARES Act to the extent they affect Iowa income taxes for tax years beginning on or after January 1, 2020.

For more information, see: CARES Act Retirement Provisions FAQ

Cyclones42Author

Level 2

@KathrynG3

Thank you for replying in such a timely manner 🙂 Is the essence of your reply saying that the income from a Covid-19 distribution CANNOT be spread over a three-year period for Iowa tax purposes? I've been following the topic since last year and have read things a little differently.

As you noted, the IA 1040 expanded instructions state "For tax years beginning on or after January 1, 2020, Iowa has adopted rolling conformity, meaning the state will automatically conform to any changes made to the Internal Revenue Code (IRC), except as specified by Iowa law. For the most part, the calculation of Iowa net income is still the same as the calculation for federal adjusted gross income (AGI). However, the calculation of Iowa net income will be different from the federal AGI calculation when it comes to certain items described later in these instructions, such as bonus depreciation, section 179 special election deductions, and the business interest expense limitation."

There is no specific mention of retirement account distributions here or in the non-conformity guidance the IDR has published throughout the past year.

Further, the IA 1040 expanded instructions for IA line 9 "Taxable Pensions and Annuities" state specifically "The same amounts of pensions and annuities are taxable for Iowa as are taxable for federal, with the exception of military retirement pay."

This suggests to me that Iowa is accepting spreading COVID distributions as long as they qualify under the Federal tax rules.

That said, I've entered my 1099-R information into Turbo Tax Deluxe Online and have answered all of the inquiries regarding the distribution being related to COVID-19 and did NOT check the box requesting that it all be taxed this year. For Fed, the taxable portion of my distribution is 1/3 of the total amount. However, for Iowa, the entire distribution is being used to calculate my Iowa refund/(liability).

I'm OK with this treatment if it is correct (and it may even be worth the slight additional cost to avoid the paperwork headaches that may arise in 2022 and 2023) but am hesitant to proceed with the filing process when it seems that the right answer as to deferral for Iowa is ambiguous at best. Is there any way to concretely resolve the question? Thank you very much for your time and expertise,

sls50211

Level 9

Here is something I found with relation to previous years disaster related retirement plan withdrawals and tax treatment in Iowa.

Iowa Treatment for Tax Year 2019: Taxpayers who take a qualified disaster distribution in 2019 and elect not to include the full amount in income for federal tax purposes must make an adjustment to include the entire distribution in income for Iowa tax purposes. Here is the link if you want to review.

I do not see anything specific to 2020 but, Iowa did not allow the deferral for 2018 or 2019 disasters. That would seem to suggest the entire amount would be taxable in Iowa in 2020.