...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).