Utah and pension taxes

[larryect]

I receive payments from a pension that is an IRS "qualified defined pension plan."  I came across an adjustment in the UT State preparation program asking for the amount of distributions paid from a "qualified retirement plan distributions." 

This is a pension that was included in my company benefit package as part of my employment, not one that I contributed to additionally.

Am I allowed to put the amount of my pension payments in that box and have it deducted from my Utah income numbers? 

It seems like if this is the case it should have automatically transferred from the Federal program.

[KathrynG3]

No. If you are referring to Line 22 for 2020 Utah Adjustments, this only applies for self-employed individuals. Since this was a qualified defined pension plan from your employer, it does not apply.

I am looking at page 36 of the 2020 Utah Individual Income Tax Instructions

[larryect]

Thanks for your reply.

But, I don't see a page 36 on the document you referenced. 

My question is in reference to an item on page 8, under line instructions for form TC-40, line 8 - subtractions from income "qualified retirement plan distributions."  I am wondering if that refers to my "qualified pension plan."  It looks like Turbo Tax is referring to a 401(a) plan.  Is that in the Utah tax code somewhere?  According to my research, I do not believe my pension is a 401(a) but my understanding is that it is an IRS "qualified plan."

Thanks for looking at this.

Larry

[larryect]

Found it on page 17.  Looks like it refers to 401(a) plans only.....

[mkaprelian]

I have this question, too.  The Utah statutes include the following language (Utah Code Sec. 59-10-114):

(2) There shall be subtracted from adjusted gross income of a resident or nonresident individual:

                                                                         * * * * 

(j) an amount of a distribution from a qualified retirement plan under Section 401(a), Internal Revenue Code, if:
(i) the amount of the distribution is included in adjusted gross income on the resident or nonresident individual's federal individual income tax return for the taxable year; and
(ii) for the taxable year when the amount of the distribution was contributed to the qualified retirement plan, the amount of the distribution:
(A) was not included in adjusted gross income on the resident or nonresident individual's federal individual income tax return for the taxable year; and
(B) was taxed by another state of the United States, the District of Columbia, or a possession of the United States.

As I understand it, a qualified plan under Section 401(a) of the IRC would include both a defined benefit plan and a 401(k) plan.  As I understand it, most distributions would satisfy conditions (j)(i) and (j)(ii)(A).  What has me stumped is, what circumstances would satisfy condition (j)(ii)(B)?  Wouldn't it be unusual for a state to tax  amounts contributed to qualified benefit plans?  If my employer made the contributions, how would I know how much of it was taxed by a state, or how much of it is attributable to my distribution?  I sure would appreciate any insights into how this adjustment is supposed to work.

[BillM223]

The Learn More on the Utah return says:

Enter any distribution from a qualified IRC Sec 401(a) retirement plan that is included in your federal AGI if, in the year it was paid into the plan, the amount was:

1. Not included in your federal AGI; and
2. Taxed by another state, D.C., the United States or a U.S. possession

In short, this says that you should enter any qualified plan distributions (which will be the vast majority of employer pension plans) so that it is not taxed in Utah, if it was (1) taxed this year on your federal return, and (2) when you made contributions to it, they were deducted/excluded on the federal return. For example, contributions to a 401(k) plan, these are excluded from Wages on your W-2., so you would enter distributions from the pension into this question in the Utah interview.

I am not sure at this point, but perhaps the amount can't be automatically transferred from the federal return, because the federal return doesn't know if the earlier contributions to the pension plan were taxed in another state (some state do).

In short, unless you know something, enter your 401(k) plan distributions into this question so that the amount of the distribution can be backed out of your state income.

P.S. "Wouldn't it be unusual for a state to tax  amounts contributed to qualified benefit plans?" Actually, Pennsylvania and New Jersey are two states that do not allow for 401(k) plan contributions to be deducted, and there are possibly others.

[mkaprelian]

Thanks for your thoughtful reply.  The hard part of my question was :what circumstances would satisfy condition (j)(ii)(B)?  i.e., did another state tax amounts contributed to the qualified benefit plan when the contributions were made?  I note that the statute is written so that it could apply to state taxes imposed on both employee and employer contributions (although that wouldn't make a lot of sense to me).

I was unaware that there were states that taxed employee contributions to 401(k) plans.  Maybe that's the situation this statutory language is intended to address, so it would only apply to distributions from employer plans in those few states.  In my case, I have distributions from a defined benefit plan where all the contributions were made by my (Wisconsin) employer, so I'm thinking I don't get to take the deduction from my Utah taxes.

[BillM223]

I think you are correct.

The "normal" case is that your plan contributions are not taxed on the federal return and not taxed on the state return. When you retrieve money from this qualified plan, you don't get to deduct it in Utah.

Only if the contributions to the plan were tax-free on the federal return and also you were taxed on the contributions by a state or other entity, do you get the distribution tax-free in Utah.

In the land of taxation, every dollar is taxed sometime. If you contributed money that was tax-free to a plan, it makes sense that you would pay tax on that money when it came back out. Utah is addressing the case of you paying tax to somebody (even if not Utah) on the contributions, so in this case, the distribution would be tax-free in Utah, as if Utah had taxed the contributions.

[larryect]

Not an expert.  But, my reading of (j) restricts the reading of (ii) and (B) to 401(a) plans.

My original question was regarding a standard employer pension plan (I know - rare anymore).  I have a 401(k) plan as well.

But, I came to the conclusion a 401(a) is a bit different.  Per Wikipedia, they are typically: "available to some employees of the government, educational institutions, and non-profits"

https://en.wikipedia.org/wiki/401%28a%29

In addition my pensions were built while I was in CA and as far as I know if they were not taxed by the Feds they also were not taxed by the State.

My conclusion was that I did not qualify for this Utah deduction.

[BillM223]

You are correct; I was thinking of the use of 401(a) to describe the group of qualified plans. No matter. 

I agree with you that you don't qualify for the deduction because you said that no state or other government entity taxed your contributions made to the plan.

Sorry if my convoluted answer did not make that clear.