Can I exclude dividends from state taxable income from investments in direct US government obligations within an IRA?

Forum|Forum|6 years ago
June 6, 2019
4 replies
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I am referring to a distribution taken from the IRA which includes us government obligation dividends.

TurboTax Premier Windows

Best answer by SteamTrain

Sorry, what you are invested in inside the IRA has no bearing on your distribution and whether it is state taxable or not.

Your IRA could contain all tax-exempt bonds from your own state, and the distribution wouldn't be exempt form taxation in your home state

.........whereas tax-exempt interest from the same bonds in an standard taxable brokerage account would not be taxed by your state.

SteamTrainAnswer

Employee

Sorry, what you are invested in inside the IRA has no bearing on your distribution and whether it is state taxable or not.

Your IRA could contain all tax-exempt bonds from your own state, and the distribution wouldn't be exempt form taxation in your home state

.........whereas tax-exempt interest from the same bonds in an standard taxable brokerage account would not be taxed by your state.

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

iansteiner1

It really depends on your state!? E.g. In NJ, according to GIT-2 IRA Withdrawals: "If the interest received by the taxpayer as part of an IRA distribution is from exempt obligations that are directly owned by the taxpayer in the IRA plan, the interest is exempt from New Jersey Income Tax. Likewise, if the IRA is part of a New Jersey “Qualified Investment Fund,” the portion of the distribution from the IRA that represents interest or gains from the qualified exempt obligations held by the fund is exempt. However, the portion of a distribution that comes from taxable investments held by the fund is taxable. If the IRA is part of a mutual fund that is not a Qualified Investment Fund, the distributions paid by the mutual fund are exempt only to the extent the distributions are from interest on federal obligations."
*The real question is how to report this info in TurboTax? and keep a running tally of this each year you take RMD? If anyone knows, then please post.

Anita01

Employee

No, distributions are considered to all be the same kind of money and are taxed as one distribution regardless of the source of the cash that was generated to pay the distribution.

JR999

"iansteiner1" is 100% correct on this for the state of New Jersey. However I cannot figure out how to input this information into TurboTax nor can I figure out of there is a way to make the adjustment manually. I need to figure out how to adjust the distributions taken from an IRA to reflect that a portion of this distribution is from US Government interest. I have both US Government interest from mutual funds and US Government interest from direct holdings of US Treasury bonds. If anyone has found a solution please respond.

CatinaT1

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JR999

Thank you. I have not been able to resolve this issue. Other than using overrides and then having to manually file, I see no way for TurboTax to handle this properly.

DaveF1006

First of all let's go to IRA withdrawals in the State of NJ website. In the section with the heading Ira Withdrawals, it says, "There is an exception to the taxability of an IRA withdrawal when the IRA funds are invested in obligations that are exempt from New Jersey Income Tax. The Gross Income Tax Act specifically excludes from income:

• Interest received from obligations of the State of New Jersey or any of New Jersey’s political subdivisions; and

• Interest received from direct federal obligations. This would include interest received from IRA distributions even though this isn't specifically mentioned in the website. This is our cited source to exclude this interest."

Now are you ready to exclude this interest?

Go to the State Tab in your Turbo Tax product.
As you navigate in the program, you will see a section that says Other Non-Wage Income
Make an entry within this section such as Excluded US obligation Interest Within IRA Distribution and then record it with a minus sign in front of it. See the screenshot at the end of this post.

Make sure you have the proper documentation that reports this amount just in case if NJ Dept of Revenue has questions.. It is usually found in a supplemental form that came with your 1099R to show how you reported this plus the citation from the website I provided above. Here is the screenshot.

@JR999

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JR999

Thank you. To be clear this is specifically mentioned in NJ Publication GIT-1&2 Retirement Income. See page 9. This is the source one would cite.

I am not sure your proposed work-around would work if one does not have other non-wage income since to my knowledge New Jersey taxes gross income and you do not get benefit for “losses/negative income” as you suggest entering. The solution provided by MarilynG1 is what TurboTax needs to build into the New Jersey software as it clearly provides for an adjustment to taxable amounts of IRA distributions at the state level. Until then, I suggest overriding Line 20a, filing manually and keeping appropriate records.