Massachusetts Taxable IRA distributions

[malcolmblue5]

My 2015 federally taxable IRA distribution is $X.  Last year, 2014 was my first distribution of $Y.    What do I put for "Other Contributions Previously Taxed by Mass?  And what do I put for Total distribution received in previous years?     The MA refund in progress was irrationally high when I put $Y for previous years.

[ScruffyCurmudgeon]

An explanation of whether or not IRA distributions are taxable in Massachusetts:

Massachusetts does not recognize the deductibility of contributions that you make when you put money into an IRA and as a result, in the year of the contribution, while you are not then taxed by the Federal government, you do have to pay tax on the earnings to Massachusetts.  The monies you contribute over the years sum up to what is known, in this case, as the Basis in your IRA.  Think of it another way, it is the invested principal.

When you have distributions from the IRA, all of the monies withdrawn are liable to Federal taxation.  However, Massachusetts views the monies being withdrawn as first being your Basis or Principal, and until you have withdrawn the entire amount of Basis that you contributed, you are not liable for Massachusetts tax on the IRA distributions, only when you "start" withdrawing earnings - meaning what is left after you have deducted all the money you contributed in.

So, you need to have a record of how much you contributed into the IRA in order to be able to answer the questions of how much of the IRA distribution was previously taxed.  IF, as an example, you have been taking distributions for some number of years, it is likely that you will have finally reached the point where none of the distribution should be excluded; on the other hand, in the first year or first years, all or most of the distribution is likely to be only Basis or principal and not subject to Massachusetts taxation.

See the image for an example where the total contributions made over the years was $100,000 and in prior years you would have distributed $65,000, thus the total now would come to $70,500 and still not have exhausted the principal so none of this year's distribution should be taxable in Massachusetts.

See second image showing the actual MA Form 1 Schedule X and the exclusion of the IRA distribution from tax.

[malcolmblue5]

Where do I find this record of how much I put in and Mass taxed at the time, especially if it included several  Rollover 401Ks with a company match?

[ScruffyCurmudgeon]

Unfortunately it is your obligation to maintain your own financial records of your investments..  Perhaps the statements from the financial institution are available for the years of record and then you can determine how much you contributed.
You as the taxpayer bear the obligation of keeping your own records!

The difficulty is that you or your employer, or both, may make the contribution into the Tax-Deferred account and the amount is only reported on a totally separate IRS Form 5498, issued at a different time from the tax filing deadline or the deadline for financial service organizations to issue Forms 1099. The IRS makes no provision for  downloading that data nor do your employers directly, although gross amount is on Form W-2 but without information as to what account or IRA the contribution was made.  Only you know so always keep a record of Forms 5498 and also all voluntary additional contributions.

[tomandjerry1]

Thanks.  Your answer makes perfect sense.  But I have a couple of additional follow-on questions.  (1)  Does MA have any sort of Required Minimum Distribution requirement like the FEDs do (at age 70 1/2)?  I suspect not since  MA already collected tax on the amounts put into your IRA(2) How does MA treat distributions that are taken as QCD and sent directly to a non-profit.  Does MA require that these be included as income (to the extent that they exceed the IRA basis)?

[joannalan3bmc]

scruffy

your answer was extremely helpful.  And very coherent!

I have a follow up Q.  My nondeductible (for state purposes) IRA account has been merged with other IRA accounts that I did get deductions on in my state.  I’m now getting RMDs on the combined IRAs but the basis only applies to the non deductible state portion of the combined IRA.  I’ve kept track of all the numbers so I know the basis of the nondeductible IRA  Can I use the basis against the entire IRA distribution even though it technically only applies to a portion of the distribution?  Or should I only deduct the basis against the portion of the RMD that is attributable, if I can figure it out, to the nondeductible IRA?

[ScruffyCurmudgeon]

Massachusetts has no Required Minimum Distribution.

[lylephipps]

Fun fact: you only get Massachusetts tax basis if you paid MA tax so you have to know how much of the IRA contributions were previous taxed in MA.  Ugh.. If none of the IRA or some other retirement contributions were ever taxed by MAss than MA is going to tax the distribution.

[ScruffyCurmudgeon]

If you have further question related to MAssachusetts DOR regulations re: IRA distributions, post your question here

[BruceR]

@Scruffy_Curmudgeon
Scruffy_Curmudgeon,
Great info, and I believe I understand it.
My question is as follows:
I have a Traditional-IRA and know my MA previously-taxed Trad-IRA basis.  I've never taken any distributions from this Trad-IRA.
I also have a RollOver-IRA which was created from a 401K rollover, so none of RO-IRA has ever been taxed by MA.
So, for a Roth-conversion from my RO-IRA account, I'm assuming that MA taxes the entire Roth-conversion amount, correct?
What confuses me is that the Schedule X Line 2 worksheet doesn't differentiate where the Roth-conversion comes from.  And since the worksheet talks about "Total" contributions & distributions, should these totals be based on just the Trad-IRA, or the sum of my Trad-IRA & RO-IRA?
In a nutshell, if my Trad-IRA basis is $20K, and I do a Roth-conversion of $5K from my RO-IRA, and this is my first distribution from either account, does MA expect to tax the $5K Roth conversion or not?
Thank you for any help!

[ScruffyCurmudgeon]

@BruceR  -been a long day for me strangely for a Saturday- will look over in early a.m.  but in quick read, I'm thinking the language "Roth-conversion from my RO-IRA account" is the key point - and since there is an inconsistency in the basis between the two prospective Roth accounts - current and future -  will get back to you -

[BruceR]

@Scruffy_Curmudgeon - I'd appreciate your thoughts on this when you have the time.
Since I posted this question, I've been doing a lot of searching, and the little I've found leads me to believe that the MA Schedule X Line 2 Worksheet doesn't differentiate between Trad-IRAs and RO-IRAs, so the Total should be the total all Trad-IRAs and RO-IRAs.  So, even though my Roth-conversion distribution came from my RO-IRA, it's not MA taxable because my Trad-IRA basis is larger than the distribution.  Basically, distributions from Trad-IRA or RO-IRA are not MA taxable until my distributions have exceeded the basis, and after reaching the basis amount, all subsequent distributions are MA taxable.
This is my current thinking, and I'm curious for your thoughts...

[ScruffyCurmudgeon]

• @tomandjerry

tomandjerry  [response to 3 year old second question as follows]

"Thanks.  Your answer makes perfect sense.  But I have a couple of additional follow-on questions.  (1)  Does MA have any sort of Required Minimum Distribution requirement like the FEDs do (at age 70 1/2)?  I suspect not since  MA already collected tax on the amounts put into your IRA(2) How does MA treat distributions that are taken as QCD and sent directly to a non-profit.  Does MA require that these be included as income (to the extent that they exceed the IRA basis)?"

1. MA DOR having not taxed any contributions to a Traditional IRA does not have an RMD, and does not assess tax on any of the contributions but does assess tax on earnings received within the IRA when those earnings are distributed.  Note MA DOR assumes that distributions are first the previous contributions and only when those are fully paid out, the remaining distributions are assessed as taxable earnings.
   
   
2. MA follows the Federal rules on QCD.  However, again, note that if the funds in whole or in part were original contributions, those funds were taxed at time of earning and are not taxed in any case on distribution.  See the above note on timing sequence, as it may be the case that a QCD where funds paid over to the charity are wholly original contributions leaving the balance in the IRA as taxable earnings.

[ScruffyCurmudgeon]

In response to your most recent questions

Re: First dollars out are basis, and again for clarity, we are discussing the Massachusetts DOR assessment of taxes on withdrawals from an IRA:

"The amount of taxable IRA distributions for your Massachusetts tax return is the amount of conventional IRA distributions you received during 2018 minus any IRA plan contributions you made to the account, unless those IRA contributions have already reduced the amount of taxable IRA distributions on a previous tax return, and minus any qualified charitable IRA distributions you received in 2018 that are included in the distribution. "

To reiterate, Massachusetts takes the position that distributions from an IRA are first the contributions made that were already taxed by Massachusetts (the "basis") and only when exhausted are the remaining distributions deemed to have been from accumulated previously untaxed income.

See also here discussion: http://www.marcumllp.com/insights-news/basis-in-iras-how-massachusetts-rules-may-differ

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Hypothetical example is that exactly- a pastiche of financial data built up to answer various questions, and in fact the taxpayer's name was: Bobbie Maygun  

I erroneously uploaded the complete hypo tax file which is unreadable but here instead is the PDF.

[BruceR]

@Scruffy_Curmudgeon
Thanks again!  I now totally understand how MA handles these distributions.