Paying State income tax on coronavirus 401k distribution over 3 years

[Hadar]

Does the State of Oregon follow the CARES Act when taking a coronavirus-related distribution from a 401k?  

I am paying the Federal tax ratably over 3 years.  Does Oregon DOR also allow this 3-year payment arrangement?

Thanks in advance.  I cannot find info on this anywhere.

[LenaH]

No. There have been no Oregon tax treatment changes to 401k distributions due to Covid-19. 

The 2020 Publication OR-17 states that retirement income continues to be subject to Oregon tax when received by an Oregon resident. 

However, on December 14, 2020, Governor Brown​ announced that the State of Oregon will continue to provide extended payment plans of up to 36 months for any taxpayer impacted by COVID-19 when entering into an approved payment plan.

[Hadar]

Thank you for your reply.

I would actually prefer to pay the entire income tax owed to Oregon for the 401k withdrawal on my 2020 return, rather than spreading out over 3 tax years.  This is because I moved to another state after taking the distribution.

The question is whether TurboTax will allow me to enter the full, much larger amount in the Oregon column of my OR-40-P return, when the Federal column will show that I'm paying tax on only 1/3 of the amount.  Do you think that the software will take into account Oregon's non-adoption of the CARES Act tax changes and allow me to enter a larger amount in the Oregon column?  I do hope so.

[SamS1]

Yes.  TurboTax has the 100% accuracy guarantee.  Your Oregon state return will  conform to the state taxing laws.  The referral of Federal income will be reported on the form 8915-E reflecting the income deferral from your 401K distribution.  The full amount of your 401K distribution will be reflected on the Oregon return as prescribed by the Oregon taxing authority.  

The pandemic has affected your taxes in many ways. Including reporting in TurboTax the amount of stimulus money you received. Click Here for more information on how the Pandemic affected your 2020  taxes.

[Hadar]

This is good news.  But I will have to wait a few more days before entering this stuff since 8915-E is not yet ready for e-file.

Thanks for responding.

[Cyclones42]

Will Turbo Tax automatically spread the coronavirus distribution over three years (if that’s what the user chooses) on the state return for those states that conform to the changes made in the federal code?  Thank you 

[Hadar]

I would imagine the taxpayer would be given the option of spreading it over 3 years for those states that allow it.

I have no firsthand experience with this, as my state does not appear to follow the CARES Act.

Finding out which states do and don't follow CARES Act regarding 401k withdrawals has been tricky.

[ThomasM125]

@Cyclones42 The state laws regarding taxation of distributions from pension plans because of Covid vary by state. But TurboTax does offer state tax programs for all states and guarantees the accuracy of all calculations, so I can assure you that your pension plan distribution will be properly handled in your state.

[Cyclones42]

@ThomasM125 

Thank you for your reply.  Are you able to address this situation specifically for Iowa?  The IA 1040 instructions note that Iowa has adopted rolling conformity with the IRC for tax years beginning on or after 1/1/20.  Also, the IA 1040 specific instructions for IA line 9 "Taxable Pensions and Annuities" state "The same amounts of pensions and annuities are taxable for Iowa as are taxable for federal, with the exception of military retirement pay."  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).  Is this due to an Iowa program update that Turbo Tax has yet to install, a software glitch, or a provision in the Iowa code that is not readily apparent regarding CRDs?  Any insight you can provide would be greatly appreciated.  Thank you.   

[ThomasM125]

@Cyclones42 I agree that the State of Iowa does seem to adopt the federal treatment of the Covid inspired pension distribution that allows you to spread the distribution over three years. When you run the numbers in TurboTax, however, the full pension is showing as taxable in Iowa.

I suspect there will be a software update however, as the federal update was just recently installed.

[Petratod]

I am having a similar issue.  I took a COVID-19 distribution from my retirement account in 2020 while a New York State resident. For 2020 taxes, I elected to spread the distribution over three years and paid federal and NY state taxes on first third of the distribution. I have since move to Connecticut and lived here all of 2021 but continue to pay state income taxes to NY because I work full time in New York, using the nonresident form (IT-203). Now, in 2021, I have completed federal form 8915-F to pay my federal taxes on the 2nd tranche of my COVID-distribution, but the Turbo-tax software is not transferring the tax obligation to New York State. It doesn't show up on the CT form either. Do I still owe state taxes on the 2nd and 3rd tranche of the COVID-19 retirement distribution? I have completed my Fed, NY, and CT, forms and Turbo-tax is indicating I do not. This does not seem correct. 

[Hadar]

If you only paid the first 1/3 to NY on 2020 return, then you definitely owe the second installment in 2021.

The problem with the State returns, I believe, is that they haven't fully absorbed these CARES Act 401k situations (especially when moving from one state to another).  Therefore, Turbo can't automatically calculate things for us correctly.  We need a tax person to improvise a creative workaround to get a result.

I had to consult online Live TurboTax help, and they worked with someone to calculate a state tax credit for me based on what I've already paid to the state I moved from.

I recommend online live help or even have someone at Turbo do the entire returns for you (the latter option will be more likely to get you what you need, but it's more costly).

[Cynthiad66]

Yes you do owe taxes on the next 2/3rd of the withdrawal.  Not all states have adopted the Federal treatment of these withdrawals the same.  So you will most likely have to improvise until the TurboTax software can be upgraded for each state.  

Try this work-around in the meantime.  I suggest adding the 1/3 payment to the NY Non-resident return where there is a section for additions and subtractions for NY income.  This will then translate to the CT return.

Note.  Your NY return should be prepared first.  Your current home state return should be entered last.

@Petratod