MA treatment of inherited IRA distributions?


R

Rich Carreiro

Massachusetts gives no deduction for traditional IRA contributions, even
when federally-deductible.

On the flip side, when distributions come out, your MA "basis" comes out
first until it's all used up and only then do distributions become
taxable in MA.

The situation here is that the MA taxpayer:
1) has an inherited trad IRA from a non-spouse relative
(who never lived in MA) and thus is taking RMDs from it.
2) has made traditional IRA contributions while in MA and
so has MA basis.

Logic (heh :) would indicate that since MA never taxed the
contributions made to the inherited IRA there should be no MA basis in
those distributions to be recovered and so the inherited IRA
distributions should be fully taxable.

However, the worksheet in question doesn't make that distinction. It
only asks for the total amount of MA basis ("contributions previously
taxed by MA"), amount of MA basis previously recovered, and the gross
amount of IRA distributions shown on the US return and then does the
subtraction. So blindly following that calculation will render the
distribution from the inherited IRA non-taxable.

The Form 1 instructions for this worksheet aren't
any better.

And even MGL 62 Section 2(a)(2)(F) doesn't seem any less
ambiguous:

[items to be deducted from federal AGI include...]

Income from annuity, stock bonus, pension, profit-sharing,
annuity or deferred-payment plans or contracts described in
sections four hundred and three (b) or four hundred and four of
the Code or individual retirement accounts, individual
retirement annuities or retirement bonds described in sections
four hundred and eight or four hundred and nine of the Code,
until an aggregate amount of such income has been deducted under
this subparagraph equal to the aggregate of all amounts
previously subjected to taxation under this chapter; provided,
that this subparagraph shall not apply to income from the
optional retirement system established by section forty of
chapter fifteen A.

Seems like that could be read either way. Does the "aggregate amount of
such income" mean all IRA income (thus including income from inherited
IRAs) or just income from your own IRA? If the former it would appear
you can use the basis in your own contributions to offset the inherited
IRA distributions while if the latter then you couldn't.

Anyone know what the definitive answer is?
 
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I

ira smilovitz

Massachusetts gives no deduction for traditional IRA contributions, even
when federally-deductible.

On the flip side, when distributions come out, your MA "basis" comes out
first until it's all used up and only then do distributions become
taxable in MA.

The situation here is that the MA taxpayer:
1) has an inherited trad IRA from a non-spouse relative
(who never lived in MA) and thus is taking RMDs from it.
2) has made traditional IRA contributions while in MA and
so has MA basis.

Logic (heh :) would indicate that since MA never taxed the
contributions made to the inherited IRA there should be no MA basis in
those distributions to be recovered and so the inherited IRA
distributions should be fully taxable.

However, the worksheet in question doesn't make that distinction. It
only asks for the total amount of MA basis ("contributions previously
taxed by MA"), amount of MA basis previously recovered, and the gross
amount of IRA distributions shown on the US return and then does the
subtraction. So blindly following that calculation will render the
distribution from the inherited IRA non-taxable.

The Form 1 instructions for this worksheet aren't
any better.

And even MGL 62 Section 2(a)(2)(F) doesn't seem any less
ambiguous:

[items to be deducted from federal AGI include...]

Income from annuity, stock bonus, pension, profit-sharing,
annuity or deferred-payment plans or contracts described in
sections four hundred and three (b) or four hundred and four of
the Code or individual retirement accounts, individual
retirement annuities or retirement bonds described in sections
four hundred and eight or four hundred and nine of the Code,
until an aggregate amount of such income has been deducted under
this subparagraph equal to the aggregate of all amounts
previously subjected to taxation under this chapter; provided,
that this subparagraph shall not apply to income from the
optional retirement system established by section forty of
chapter fifteen A.

Seems like that could be read either way. Does the "aggregate amount of
such income" mean all IRA income (thus including income from inherited
IRAs) or just income from your own IRA? If the former it would appear
you can use the basis in your own contributions to offset the inherited
IRA distributions while if the latter then you couldn't.

Anyone know what the definitive answer is?
I don't know the answer for MA, but NJ, which also doesn't allow deductions for IRA contributions, treats IRAs which "move into" NJ as if they were always in NJ. That is, if you can establish what the basis would have been, you can recover that basis when distributions are made.

Ira Smilovitz
Leonia, NJ
 
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J

JoeTaxpayer

Massachusetts gives no deduction for traditional IRA contributions, even
when federally-deductible.

On the flip side, when distributions come out, your MA "basis" comes out
first until it's all used up and only then do distributions become
taxable in MA.

The situation here is that the MA taxpayer:
1) has an inherited trad IRA from a non-spouse relative
(who never lived in MA) and thus is taking RMDs from it.
2) has made traditional IRA contributions while in MA and
so has MA basis.

Logic (heh :) would indicate that since MA never taxed the
contributions made to the inherited IRA there should be no MA basis in
those distributions to be recovered and so the inherited IRA
distributions should be fully taxable.
Everything regarding the Inherited IRA is separate from any other IRAs.
Basis in the other IRAs has no impact at all for this. So (1) and (2)
above are unrelated to each other.

I am in a similar situation an inherited IRA from another state. The
RMDs (ans any withdrawal) seems taxable to me, in the same way that one
can move to a no-state-income-tax state and avoid the tax, by being
here, I have to pay it.
 

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