Over the weekend, I was indirectly able to get in touch with a highly-regarded and very knowledgeable tax attorney regarding this issue. I think I finally have answers that may satisfy everyone here.
1) A Rule 72(t) (SEPP) IRA distribution is indeed a Code 2.
2) A Code 2 is an Early Distribution "with exception."
3) "With exception" simply means there's no early-withdrawal penalty at the federal level from IRS.
4) Rule 72(t) Early Distributions (<59.5) are taxable income in Mississippi--even as Code 2.
With the hubbub on here, to which I ashamedly contributed, I decided to go over my last few years of returns. In every single instance, my Mississippi returns show the 72(t) money as taxable income. However, the amount I draw is less than my combined deductions, so my Mississippi income is a negative number and I pay $0 in state taxes. I incorrectly assumed it was $0 because it wasn't taxed; in truth it was due to deductions beyond the income reported. So on this point, what the TT people here have posted is absolutely correct.
As for pensions, I cannot speak to anything besides my particular Federal pension. Here, TT has definitely changed things but perhaps not due to anything they internally control. Perhaps.
Looking back at my returns, most years TT did not include my pension as taxable income on my Mississippi return. Starting with my 2018 taxes, however, TT has included my pension as taxable income at the State level--even with knowing it's a CSA-1099-R and with knowing it's a Code 2. What changed? I have no idea but I wonder if perhaps the tax law changes under Trump have something to do with it. About the same time (either 2017 or 2018, I can't recall) as TT started saying my pension is state-taxable, the brokerage for my 72(t) stopped issuing my 1099-R with a Code 2. Instead, I always get a 1099-R with a Code 1, even though that's incorrect. The brokerage had sent a letter out saying they would no longer determine (take note of that word!) the taxable status of the money. On the pension point, I think the TT Experts here didn't explain, or perhaps understand, the issue well enough.
Now about that word "determine." As noted above, in 2017 or 2018 my brokerage said they no longer would determine the Code of my 1099-R. In this chain of posts, TT has said they cannot determine the taxable status of the monies. Given both entities use the word "determine," my thinking is perhaps we TT users have misread what's meant by "cannot determine." It may not be that TT is physically or mentally unable to do so or is unwilling to do so; it perhaps may be some tax-law changes now prevent TT from making that determination for the taxpayer. This would explain why my brokerage stopped doing it and it may also explain why MS DoR is fine with the negative income item being added to the form as one of the TT Experts here has directed.
That all said, I offer a mea culpa to the TT Experts here who have responded in good faith and with what appears to be helpful and correct knowledge. I would love to know if my assumption of "cannot determine" as mentioned above is correct. It would certainly help explain things to us TT users. I also think it would be wise and prudent for TT to give further (some? any?) direction to customers about inserting the negative income on State returns. To my knowledge the TT program itself never addresses this tax-costing quirk and had I not come here, I would've never known what was going on or how to fix it. (I probably would've simply taken my stuff to a CPA, thus spending even more money to do my taxes.) Finally, I think it would be nice if TT asked a series of questions to determine the taxable status of monies, whether pension or otherwise, for those under 59.5 years and then prompt for or do the negative-income insertion. But perhaps that's not allowed, either.
In closing, though I dislike how TT is handling the income on my State returns, I now understand that it is doing so and I have a strong suspicion that it may be beyond TT's control to do otherwise. I'll be filing my taxes later today--paying $0 to Mississippi after adding my negative income for my Federal pension.
Thank you, TT Experts for your work!
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