Roth IRA Distribution Taxed in Massachusetts

[rjlesch]

My wife inherited a Roth IRA from her Aunt which was established in 2002.  The 1099-R had a code of T-Exceptions Apply with taxable amount not determined (we had transferred the roth to new custodian).  On the Fed return, Turbo-tax asked with the original IRA was opened and then correctly determined it was not taxable.

My issue is the State return is showing it as taxable when it Massachusetts basically follows the same rules - any suggestions?

[AmyC]

In the MA program, you must enter the contributions previously taxed by Mass. If you cannot prove the amount, it is zero. If you have old tax returns or financial documents, you may be able to determine the amount taxed. 

The state of MA has very different laws than the federal regarding IRAs and is much more complicated. The Jan 2023 update of MA treatment of Roth states: Further, Massachusetts allows a deduction for the portion of IRA distributions that were previously subject to Massachusetts personal income tax. The distributions are deducted from Massachusetts gross income to the extent that the aggregate amount deducted equals the aggregate amount previously included in Massachusetts gross income. 

This means you must be able to show what has been taxed and the remainder is taxable. Income to the decedent is income to you.  Enter the amount you know has been taxed and can prove, in case of audit. Best case would be if you could determine all contributions and distributions to enter here.

[rjlesch]

Thanks for responding.  I am a bit confused though.  If I read things correctly, you are saying that I am taxable on any earnings on the Roth - why would that be?

[AmyC]

Sorry! Glad you replied. Because you have a ROTH, if you meet the qualifications, it is tax free.

MA just doesn't know anything at all. They don't know what is earnings, basis, tax-free, etc.  MA wants to tax whatever they can. The key is in the boxes I posted above: 

Other contributions - everything ever contributed

Total distributions - everything taken out

The more contributions, the tax basis is lowered and the refund goes up. As the prior distributions go up, the refund goes down.

If you enter the full amount of box 1 in contributions, nothing is taxable.

I did $4000 box 1 and marked $3000 in contributions with nothing in distributions so Sch X shows $1,000 taxable.

[rjlesch]

Thank you.  So to summarize - Since it is a inherited Roth IRA and was established for more than 5 years at the time of the original account owner's death, I believe we meet the qualifications for it being a tax-free distribution - is that correct?

Thanks again for your help

[GeorgeM777]

Yes, that is correct.  Form 1 of your MA return should reflect the Roth IRA distribution as tax exempt.  

@rjlesch

[rjlesch]

And so this is my issue.  I meet all the requirements for qualified distribution yet it is showing as fully taxable on my state return.  All good on the federal return, but incorrectly shown as taxable on the Mass return.

Is this a bug in the software?  What am I missing?

Thanks

[JohnB5677]

This is not a bug.  It is the Massachusetts law.  Massachusetts does not follow the same rules as the IRS.

@AmyC has two posts above that detail how to properly post your Massachusetts tax return.  You must go into your state return and continue through the interview until you find the appropriate screen.

  @rjlesch 

[rjlesch]

I am not making myself clear and perhaps I am misunderstanding something, but to recap

1.  This is an inherited Roth IRA

2. The original owner passed away in 2021 and opened the account in 2002

3.  I answered all questions in Fed and State interviews

Per mass.gov, Roth IRA distributions are excludable in their entirety  if they are open at least five years AND meet one of the following conditions

    (a)  You were at least 59 and a half years old when it was distribute

   (b) You are disabled
    (c) The distribution is made to a beneficiary or your estate on or after your date of death
   (d) The distribution is paying for a qualified first time homebuyer expense (up to $10,000)

In this case, the account was open for 5 years and (c) above is true.  So excludable from Mass income

So why does entering different values for contributions and prior withdrawals change the taxable amount if it is all excluded to begin with?

@JohnB5677 

[JohnB5677]

This is not TurboTax it is Massachusetts.

Massachusetts Law

Massachusetts gross income equals federal gross income with certain modifications, and, as a result, generally follows federal income exclusions. G.L. c. 62, §§ 1, 2, 3. However, Massachusetts adopts federal gross income as determined under the Internal Revenue Code ("IRC") as amended and in effect on January 1, 1988. G.L.c.62, 

1. Roth and Education IRAs were enacted and became part of the IRC after January 1, 1988. I.R.C. §§ 408A; 530. 
2. Therefore, Massachusetts law does not adopt the federal exclusions for income accruing in these accounts. 
3.  In addition, Massachusetts law does not adopt the Roth IRA rollover provisions because they are not part of the 1988 Code. 
4. Coincidentally, the 1988 Code provisions applicable to distributions from existing IRAs would include in Massachusetts gross income the same portion of the distributions that are includible in federal gross income under the current code.

Massachusetts Personal Income Tax Treatment of Roth and Education IRAs

[rjlesch]

I reviewed what you sent and understand.  But what I sent seems to directly contradict what I sent earlier:

Distributions from Roth IRA are excludable from your Massachusetts grosss-income if the IRA is held for 5 years and it meets 1 of the following conditions:
* You were at least 59 and a half years old when it was distributed
 * You are disabled
* The distribution is made to a beneficiary or your estate on or after your date of death
* The distribution is paying for a qualified first time homebuyer expense (up to $10,000)

I appreciate your time on this.  I will have to work out this contradiction in my mind on my own.

[AmyC]

Awesome research work. The MA DOR website updated Jan 6, 2023 is different than the MA tax treatment of ROTH website, updated Jan 6, 2023. Both of these websites are sponsored by the DOR.

The MA General Laws can be found here.

I would exclude the income and keep a copy of what the DOR says, the URL, and where it shows the updated date for 2023.

[rjlesch]

Thank you very much @AmyC   That is what I will do.  Have a great day.