Author Topic: Massachusetts taxes IRA contributions  (Read 5505 times)

beltim

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Massachusetts taxes IRA contributions
« on: July 31, 2015, 03:47:37 PM »
While doing some research, I discovered that Massachusetts does not give a deduction for traditional IRA contributions.  I had thought all states had the same rules as the federal government, so this surprised me.  What's worse, Massachusetts still taxes traditional IRA withdrawals at ordinary income tax rates, although it does give a deduction corresponding to the contributions.

Are there any other states that don't allow deductions of traditional IRA contributions for state tax purposes?

Source: http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/massachusetts-income/pensions-non-government.html#Traditional

seattlecyclone

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Re: Massachusetts taxes IRA contributions
« Reply #1 on: August 01, 2015, 09:33:59 AM »
I'm not sure about other states and IRAs, but my coworkers in California complain about how their state pretends HSAs don't exist (treating them like a taxable account for state tax purposes) and all of the headaches that go along with that.

forummm

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Re: Massachusetts taxes IRA contributions
« Reply #2 on: August 01, 2015, 10:00:10 AM »
What's worse, Massachusetts still taxes traditional IRA withdrawals at ordinary income tax rates, although it does give a deduction corresponding to the contributions.

Is this really any different than what the federal government does?

beltim

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Re: Massachusetts taxes IRA contributions
« Reply #3 on: August 01, 2015, 10:05:40 AM »
What's worse, Massachusetts still taxes traditional IRA withdrawals at ordinary income tax rates, although it does give a deduction corresponding to the contributions.

Is this really any different than what the federal government does?

On withdrawals? No, but the federal government gives the tax deduction for contributions.  And the federal government has preferential tax rates for taxable investments.

forummm

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Re: Massachusetts taxes IRA contributions
« Reply #4 on: August 01, 2015, 10:10:30 AM »
What's worse, Massachusetts still taxes traditional IRA withdrawals at ordinary income tax rates, although it does give a deduction corresponding to the contributions.

Is this really any different than what the federal government does?

On withdrawals? No, but the federal government gives the tax deduction for contributions.  And the federal government has preferential tax rates for taxable investments.

But not T. IRAs. You said "what's worse...". It seems as though taxing T. IRA distributions as normal income is the same as what the feds and presumably every or almost state does.

I agree that it's irritating for you that you can't get a state deduction for a T. IRA contribution. But at least they are not double taxing you when you take it back out (although another state will probably tax you for it when you take it back out if you leave MA).

johnny847

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Re: Massachusetts taxes IRA contributions
« Reply #5 on: August 01, 2015, 10:56:12 AM »
What's worse, Massachusetts still taxes traditional IRA withdrawals at ordinary income tax rates, although it does give a deduction corresponding to the contributions.

Is this really any different than what the federal government does?

On withdrawals? No, but the federal government gives the tax deduction for contributions.  And the federal government has preferential tax rates for taxable investments.

But not T. IRAs. You said "what's worse...". It seems as though taxing T. IRA distributions as normal income is the same as what the feds and presumably every or almost state does.

I agree that it's irritating for you that you can't get a state deduction for a T. IRA contribution. But at least they are not double taxing you when you take it back out (although another state will probably tax you for it when you take it back out if you leave MA).

So to make sure I understand this correctly, suppose I live in MA and I contribute $5500 to my tIRA this year.
By the time I turn 59.5, suppose $5500 has turned into $15.5k.
When I withdraw that $15k, they tax me on $15,5k - $5.5k = $10k?


If that's the case, I would say that if MA is going to tax the contributions as normal, at least don't tax the withdrawals. They've totally destroyed the benefit of the tIRA at the state level.

New Jersey, for example, doesn't give a deduction for tIRA contributions, but doesn't tax the withdrawals. So they've basically turned a tIRA to a Roth at the state level. So you may not get the tax benefit you wanted, but you still get one.

MA has turned a tIRA with a zero basis into a tIRA with a basis equal to your contributions. The entire tIRA is composed of non deductible contributions from a state level.  Now there are minor tax benefits of a non deductible tIRA (you can trade and receive dividends without having those become taxable events) but these benefits are nothing compared to what the federal government gives you in return for your loss of liquidity.

In short, this is bullshit, and IMO beltim's sentiments are perfectly justified.

beltim

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Re: Massachusetts taxes IRA contributions
« Reply #6 on: August 01, 2015, 11:25:25 AM »
Johnny's calculation is exactly right.  And thanks for sharing the NJ treatment - I wasn't aware of that one.

Forummm - the "what's worse" just meant that MA doesn't provide some alternative treatment that provides any benefit to what are federally deductible traditional IRA contributions - they've turned it into a non deductible IRA contribution for state tax purposes.  And, since MA has only one income tax rate, you can't take advantage of different tax rates (assuming income above deductions).

Cathy

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Re: Massachusetts taxes IRA contributions
« Reply #7 on: August 01, 2015, 11:34:45 AM »
...They've totally destroyed the benefit of the tIRA at the state level. ...

Under the Internal Revenue Code ("IRC"), an IRA has two very distinct tax benefits:
  • Subject to certain conditions, a taxpayer can take a deduction for contributions to an IRA pursuant to 26 USC § 219(a); and
  • An IRA is generally exempt from tax under the IRC, other than the tax on unrelated business imposed by 26 USC § 511 and subject to certain other restrictions: 26 USC § 408(e)(1).

The effect of benefit (2) is that, if all conditions are satisfied, when an IRA receives interest and dividends or realises a capital gain, it does not need to pay any tax on that income. Furthermore, in the absence of any special rules, distributions from an IRA would generally not be taxable at all because taking a distribution from a self-settled grantor trust is generally not a taxable event; it consists solely of moving your money from one pocket to another. Of course, there is such a special rule: 26 USC § 408(d) provides that amounts distributed from an IRA are, subject to some modifications, taxed in the manner provided for distributions from an annuity, as described in 26 USC § 72.

Each state of the United States has its own tax laws. If a state or foreign country's tax laws do not specially handle IRAs, then IRAs will be handled under the normal principles applicable to trusts or custodial accounts (as the case may be). Although the normal rules vary by jurisdiction, the general rule is that a self-settled grantor trust or custodial account is not a separate entity for tax purposes, such that (i) contributions to the trust or account offer no tax benefit, (ii) dividends and interest received from trust property and capital gains on the disposition of trust property are taxable to the grantor as if the trust did not exist, and (iii) distributions from the trust are generally not taxable to the grantor.

The Legislature of Massachusetts has generously modified these default rules in MGL, c 62, § 5(d), which provides that "no tax shall be imposed under this chapter upon any ... individual retirement account qualifying under section four hundred and eight of the Code". The term "Code" means the version of the IRC that existed on January 1, 2005, except for certain provisions for which the current version of the IRC is used (which includes most but not all of the provisions relevant to IRAs): MGL, c 62, § 1(c).

In other words, Massachusetts offers tax benefit (2) mentioned above. So it has not "totally destroyed the benefit of the [IRA] at the state level".

Under the Massachusetts tax code, "gross income" means the "gross income" as calculated under the Code (as described above), subject to some modifications: MGL, c 62, § 2(a). This thus incorporates by reference 26 USC § 408(d) providing that distributions from an IRA are taxed as if they were distributions from an annuity, subject to certain modifications. However, as mentioned by beltim, Massachusetts offers a further benefit by providing a deduction from gross income for distributions from an IRA "until an aggregate amount of such income has been deducted ... equal to the aggregate of all amounts previously subjected to taxation under this chapter": MGL, c 62, § 2(a)(2)(F).
« Last Edit: August 01, 2015, 12:13:14 PM by Cathy »

forummm

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Re: Massachusetts taxes IRA contributions
« Reply #8 on: August 01, 2015, 11:35:38 AM »
What's worse, Massachusetts still taxes traditional IRA withdrawals at ordinary income tax rates, although it does give a deduction corresponding to the contributions.

Is this really any different than what the federal government does?

On withdrawals? No, but the federal government gives the tax deduction for contributions.  And the federal government has preferential tax rates for taxable investments.

But not T. IRAs. You said "what's worse...". It seems as though taxing T. IRA distributions as normal income is the same as what the feds and presumably every or almost state does.

I agree that it's irritating for you that you can't get a state deduction for a T. IRA contribution. But at least they are not double taxing you when you take it back out (although another state will probably tax you for it when you take it back out if you leave MA).

So to make sure I understand this correctly, suppose I live in MA and I contribute $5500 to my tIRA this year.
By the time I turn 59.5, suppose $5500 has turned into $15.5k.
When I withdraw that $15k, they tax me on $15,5k - $5.5k = $10k?


If that's the case, I would say that if MA is going to tax the contributions as normal, at least don't tax the withdrawals. They've totally destroyed the benefit of the tIRA at the state level.

New Jersey, for example, doesn't give a deduction for tIRA contributions, but doesn't tax the withdrawals. So they've basically turned a tIRA to a Roth at the state level. So you may not get the tax benefit you wanted, but you still get one.

MA has turned a tIRA with a zero basis into a tIRA with a basis equal to your contributions. The entire tIRA is composed of non deductible contributions from a state level.  Now there are minor tax benefits of a non deductible tIRA (you can trade and receive dividends without having those become taxable events) but these benefits are nothing compared to what the federal government gives you in return for your loss of liquidity.

In short, this is bullshit, and IMO beltim's sentiments are perfectly justified.

But this is exactly what the federal policy is if you make a nondeductible contribution. The point is that a TIRA works for you if your tax bracket is lower in retirement than while working. Either you pay normal income tax on it now or normal income tax on it later. It's great that New Jersey has a slightly better deal.

Johnny's calculation is exactly right.  And thanks for sharing the NJ treatment - I wasn't aware of that one.

Forummm - the "what's worse" just meant that MA doesn't provide some alternative treatment that provides any benefit to what are federally deductible traditional IRA contributions - they've turned it into a non deductible IRA contribution for state tax purposes.  And, since MA has only one income tax rate, you can't take advantage of different tax rates (assuming income above deductions).

Yes, so it's not "worse"--it's the same. You get the benefit at the federal level, but the state doesn't give you anything special. What I would say is "worse" is if you pay MA tax on the contributed amount and then retire in a different state where you have to pay tax on the full withdrawal amount--so you're paying double state tax on the contributed portion.

johnny847

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Re: Massachusetts taxes IRA contributions
« Reply #9 on: August 01, 2015, 11:51:02 AM »
What's worse, Massachusetts still taxes traditional IRA withdrawals at ordinary income tax rates, although it does give a deduction corresponding to the contributions.

Is this really any different than what the federal government does?

On withdrawals? No, but the federal government gives the tax deduction for contributions.  And the federal government has preferential tax rates for taxable investments.

But not T. IRAs. You said "what's worse...". It seems as though taxing T. IRA distributions as normal income is the same as what the feds and presumably every or almost state does.

I agree that it's irritating for you that you can't get a state deduction for a T. IRA contribution. But at least they are not double taxing you when you take it back out (although another state will probably tax you for it when you take it back out if you leave MA).

So to make sure I understand this correctly, suppose I live in MA and I contribute $5500 to my tIRA this year.
By the time I turn 59.5, suppose $5500 has turned into $15.5k.
When I withdraw that $15k, they tax me on $15,5k - $5.5k = $10k?


If that's the case, I would say that if MA is going to tax the contributions as normal, at least don't tax the withdrawals. They've totally destroyed the benefit of the tIRA at the state level.

New Jersey, for example, doesn't give a deduction for tIRA contributions, but doesn't tax the withdrawals. So they've basically turned a tIRA to a Roth at the state level. So you may not get the tax benefit you wanted, but you still get one.

MA has turned a tIRA with a zero basis into a tIRA with a basis equal to your contributions. The entire tIRA is composed of non deductible contributions from a state level.  Now there are minor tax benefits of a non deductible tIRA (you can trade and receive dividends without having those become taxable events) but these benefits are nothing compared to what the federal government gives you in return for your loss of liquidity.

In short, this is bullshit, and IMO beltim's sentiments are perfectly justified.

But this is exactly what the federal policy is if you make a nondeductible contribution. The point is that a TIRA works for you if your tax bracket is lower in retirement than while working. Either you pay normal income tax on it now or normal income tax on it later. It's great that New Jersey has a slightly better deal.

Johnny's calculation is exactly right.  And thanks for sharing the NJ treatment - I wasn't aware of that one.

Forummm - the "what's worse" just meant that MA doesn't provide some alternative treatment that provides any benefit to what are federally deductible traditional IRA contributions - they've turned it into a non deductible IRA contribution for state tax purposes.  And, since MA has only one income tax rate, you can't take advantage of different tax rates (assuming income above deductions).

Yes, so it's not "worse"--it's the same. You get the benefit at the federal level, but the state doesn't give you anything special. What I would say is "worse" is if you pay MA tax on the contributed amount and then retire in a different state where you have to pay tax on the full withdrawal amount--so you're paying double state tax on the contributed portion.

forumm I don't think you and I are on the same page. MA has destroyed the benefit of a tIRA, eliminating the possibility of deductible contributions to a tIRA at the state level. It's not that beltim is making a non-deductible contribution. Beltim's contribution is perfectly deductible at at the federal level but never at the state level.
In this scenario, at the MA level, beltim receives NO tax benefit on contributions now OR later.

New Jersey's "deal" is still bullshit. They've bastardized your tIRA into a Roth IRA at the state level, but this doesn't work if you move from NJ right before you retire.

Cathy

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Re: Massachusetts taxes IRA contributions
« Reply #10 on: August 01, 2015, 12:00:20 PM »
...MA has turned a tIRA with a zero basis into a tIRA with a basis equal to your contributions....

The Massachusetts system is actually slightly more generous than this. In my post above, I described certain relevant IRA principles and that post should be read first.

In this post, I will just explain why the Massachusetts tax code is a bit more generous than the quoted text above suggests. I am too lazy to write out the full legal explanation this time, but basically, for US federal tax purposes, distributions from an IRA are subject to a rule of proportional allocation between "investment in the contract" (basis) and "income on the contract". This is commonly referred to as the "pro rata rule" and the legal basis therefor is 26 USC § 72(e)(2)(B), which is made applicable to IRAs that are not annuities in the manner described by the combined effects of 26 USC §§ 72(e)(5)(D)(iii), 72(e)(6), 72(e)(6), 72(e)(8), and 72(c)(4).

By contrast, as described in the previous post, Massachusetts provides a straight deduction for distributions from an IRA until the amount of such distributions exceeds the amount previously taxed by Massachusetts. In other words, Massachusetts has no "pro rata rule" for this purpose; the entire distribution comes out of basis until all the basis is used up. This is more generous than the federal rule.
« Last Edit: August 01, 2015, 12:06:49 PM by Cathy »

johnny847

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Re: Massachusetts taxes IRA contributions
« Reply #11 on: August 01, 2015, 12:33:03 PM »
...MA has turned a tIRA with a zero basis into a tIRA with a basis equal to your contributions....

The Massachusetts system is actually slightly more generous than this. In my post above, I described certain relevant IRA principles and that post should be read first.

In this post, I will just explain why the Massachusetts tax code is a bit more generous than the quoted text above suggests. I am too lazy to write out the full legal explanation this time, but basically, for US federal tax purposes, distributions from an IRA are subject to a rule of proportional allocation between "investment in the contract" (basis) and "income on the contract". This is commonly referred to as the "pro rata rule" and the legal basis therefor is 26 USC § 72(e)(2)(B), which is made applicable to IRAs that are not annuities in the manner described by the combined effects of 26 USC §§ 72(e)(5)(D)(iii), 72(e)(6), 72(e)(6), 72(e)(8), and 72(c)(4).

By contrast, as described in the previous post, Massachusetts provides a straight deduction for distributions from an IRA until the amount of such distributions exceeds the amount previously taxed by Massachusetts. In other words, Massachusetts has no "pro rata rule" for this purpose; the entire distribution comes out of basis until all the basis is used up. This is more generous than the federal rule.

Oops totally missed that post when I was writing my previous one.

But I'm still confused Cathy
In other words, Massachusetts offers tax benefit (2) mentioned above. So it has not "totally destroyed the benefit of the [IRA] at the state level".

I guess you're just being pedantic and focusing on my word "totally." I do mention previously that
Now there are minor tax benefits of a non deductible tIRA (you can trade and receive dividends without having those become taxable events) but these benefits are nothing compared to what the federal government gives you in return for your loss of liquidity.

Still Cathy, you make it sound like MA is doing you a favor, when the norm is for states to treat tIRAs exactly how the federal government does.

Heck, GA does one step better than the norm. There is a retirement income exclusion. You get your normal tIRA deduction at GA tax level. Then, there is a retirement income exclusion that kicks in at 62. In 2012 the exclusion amount was $65k per taxpayer. "Retirement income includes – but is not limited to— IRA withdrawals, interest, dividend, rent and royalty income, capital gains, pensions, annuities, other unearned income and up to $4,000 of earned income."
http://www.redwoodwm.com/newsletters/primer-on-tax-breaks-for-georgias-senior-taxpayer-february-2011-newsletter/


I'm still not understanding some of the sentiment on this thread that MA isn't doing all that bad a thing. Of course they are in the context of the norm that most states treat tIRAs like the federal government does.

appleshampooid

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Re: Massachusetts taxes IRA contributions
« Reply #12 on: July 31, 2018, 02:10:39 PM »
Just discovered this "fun fact" myself. Frickin' Taxachusetts.

I've never had the option of a traditional IRA at any point in my working career, always being covered by a workplace retirement plan. But my wife is leaving her job this year, and next year we will be probably be eligible to make a fully-deductible tIRA contribution to her account (depends mostly on my company's stock price when my RSUs vest). Probably will still do it, but now an additional level of headache keeping track of my "Massachusetts tax basis" in the tIRA. I hope to god we don't retire in this state...probably will be somewhere like New Hampshire or Florida, thankfully neither with state income taxes so no double state taxation. But still seems shifty. IMO, you should be able to apply your MA tax basis to whatever state is your taxing authority when you go to make distributions.