Is it worth calculating the U.S. Government dividends (for Oregon taxes) from an IRA withdrawal (Vanguard mutual funds)?

[jdseymour]

Oregon doesn't tax the interest received from U.S. Government bonds.

I made my first withdrawal from an IRA (at Vanguard) last year and Turbotax is asking me how much of my dividends came from U.S. Government obligations.

Vanguard releases a document each year showing the percentage of the dividends for each mutual fund that came from U.S. government obligations.  Theoretically, I can go back to ALL years I've had the IRA and determine how much of each fund is deductible.  However, my gut says it may not be worth it.

Does anyone have experience with this?  I'm a guy who loves details, but this seems like too much...

[Hal_Al · Accepted solution]

Actually, you do not have to make that decision.  Note that your distribution, from the IRA,  was reported on a form 1099-R, not a form 1099-DIV.

Although the IRA was earning dividend income, while the money was in the IRA, it is not treated as dividend income when it is withdrawn (distribution).  It is taxed as plain retirement income and  the type of investments, it came from within the IRA are ignored. None of the 1099-R amount is considered as coming form US government obligations. 

[jdseymour]

Thanks for this.  I suspected that was the case - but the TurboTax guidance implied (to me) that it wasn't.

Perhaps Intuit could make this clearer in their question because all they say is: "Some of the money in our IRA ... was invested in U.S. government bonds and notes".  And that seems true for most people with mutual funds.

[dn4whtvr]

OAR 150-316-052 says (I'm not a lawyer and you get what you pay for on these community posts.) that you can keep track of how much interest in your IRA came from US Government interest and that it is reduced from federal taxable income on your Oregon return.  The problem is that Turbo Tax calculates the percentage of exemption inaccurately so you have to hard code over it in the form (when you do, exit and then go back in and make sure the total changed). 

Why would you do this? There are federal IRA distribution reasons that don't incur the 10% penalty, such as college tuition and terminal illness, so when you pull those funds out, you pay federal income taxes but now you don't pay Oregon income taxes. 

[user17736846129]

Yes, if your distribututions or conversions to Roth's are large enough, it is worth it and when I did the calculation I found that Turbo Tax only had one entry for one IRA distribution so you need to lump them together if you have multiple and override the calculation to get a correct entry.