Massachusetts Taxable IRA distributions

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When you have distributions from the IRA, all of the monies withdrawn are liable to Federal taxation.  However, Massachusetts views the monies being withdrawn as first being your Basis or Principal, and until you have withdrawn the entire amount of Basis that you contributed, you are not liable for Massachusetts tax on the IRA distributions, only when you "start" withdrawing earnings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

• @tomandjerry

"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.

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. "

@BruceR

Correct:  Massachusetts adopts the same principal as does the IRS that distributions from a deferred income IRA which contains both previously taxed principal ("basis") and accumulated untaxed income generated cause the basis to be withdrawn first so that only when the basis is exhausted do successive withdrawal recognize the untaxed income.

As to the Rollover IRA with the proceeds of the terminated §401(k) deferred income - please note that a §401(k) plan usually has two separate accounts, with one being your already taxed contributions and a second with employer-matched untaxed (as yet) contributions.  It is helpful to keep the two accounts separate so that accounting for what is and what is not subject to tax liability is simple, if not then you must maintain an accounting record to properly reflect the basis.  Assuming that you are only discussing your untaxed contributions to the §401K plan [NOTE: this applies at both Federal and Mass. level] , it would be best if you could segregate those untaxed principal contributions and their earnings. Otherwise you will have to and must continue to maintain an accounting that recognizes this separate basis of untaxed funds.

If I have a $20,000 RMD for 2022, however, I had $5000 directed to a QCD.  Why then does the TurboTax Massachusetts page say I received the whole $20,000?  Am I paying Mass. tax on the whole RMD, rather than just the $15,000 I actually received?