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

[Cyclones42]

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.

[KathrynG3]

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

[Cyclones42]

@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,

[SamS1]

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.

[Cyclones42]

@SamS1 

Thank you for that link.  That was a very informative document and was useful for putting 2020 distributions in the proper context.  I definitely agree with you that the spirit of the Iowa law for disasters in 2018 and 2019 was to treat federally tax-favored withdrawals from retirement plans as reportable in full for state tax purposes as it related to the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the law from which the link you sent me was a reference to), which was signed into law on 12/20/19.

However, wouldn’t the adoption of rolling conformity with the IRC for tax year 2020, by definition, change the way such items were treated going forward unless they were specifically identified as needing to be treated differently?

Throughout the past year, the IDR has published numerous memoranda regarding Iowa non-conformity with the CARES Act signed into law on 3/27/20.  None of this non-conformity guidance references federally tax-favored withdrawals from retirement plans or Section 2202 of the CARES Act. 

Further, the link you sent indicates that, for 2019 distributions the non-conformity add-back for Iowa would be handled on form IA 101 “Nonconformity Adjustments” line 12.  In reviewing the current IA 101 instructions (Rev. July 2020), there is no such provision for an add-back adjustment to 2020 distributions under the CARES Act.  This seems to suggest that the distribution amount for Fed is to be treated as the same amount for Iowa.

A natural question that arises from this would be how is the Turbo Tax program handling the difference between the Federal distribution spread over three years versus the Iowa distribution which is being forced as a lump sum, regardless of the users indicated treatment preference?  If Turbo Tax is automatically adding this back through line 12 of form IA 101, this appears to be in conflict with the literature and appears to be an error in the program itself. 

Any thoughts on this?  And thank you very much for your time and expertise.

[SamS1]

Both the 2018 and 2019 language references "qualified disaster distribution" under Section 202.  I would suggest if the 2020 Covid distribution is referenced in the same provision in the Cares Act as the 2018 and 2019 disaster declarations were, then the full amount would be includable in the 2020 Iowa tax. Additionally, for federally reporting purposes, the form 8915E is the same reporting form as the previous disaster distribution reporting forms.  I do not know if this is Section 202 of  US Tax code or the Code of Iowa.  This is probably the same link,

If you disagree with the reporting in TurboTax, you could add a manual adjustment to income for the 2/3 to be reported in future years with an addition to income for 1/3 in 2021 and 2022.

[Cyclones42]

@SamS1 

Thank you for the time you've spent on this and for providing your perspective.  I have one last question.  Can you please tell me what are the Iowa form number and line number on that form that Turbo Tax uses to report the addition to Iowa income for the 2/3 of the distribution that are not included on the Federal return?  Thanks again for your help. 

[SamS1]

It is included on the IA1040 line 8 or line 9 depending on the type of withdrawal.  TurboTax is bringing over the entire taxable portion of the Covid withdrawal and entering it on those lines.  I do not see an additional schedule or form in TurboTax indicating it is an adjustment to the Fed taxable portion.  Another option you might try is calling Taxpayer Service to see what there response is on the deferral.  The phone number is 515-281-3114 or 800-367-3388.