VA taxation of qualified distribution received in 2020, reported in 2021

[NancyT]

Taxpayer was a MD resident when he took an IRA distribution in 2020. He elected to take the Covid exception and spread the income over 3 years. He paid federal and MD tax on 1/3 of the distribution in 2020.

He is a full year resident of VA for 2021. The ProSeries program carries the income for year 2 of the distribution to VA return. Should client be taxed on income actually received when he was a non-resident?

Should he file a non-resident Maryland return and pay tax on the second installment of the distribution and exclude it from VA?

Thanks for any help!

[qbteachmt]

"Should he file a non-resident Maryland return and pay tax on the second installment of the distribution and exclude it from VA?"

Have you looked into the requirements? Some States want you to list everything, then they give a credit back for tax paid to other States. Some States tax everything for the resident, no matter where it is from. Some States will tax retirement not originating in their State. Some States have minimum exclusions. Some don't.

You have to look up what applies for your taxpayer.

[NancyT]

I have researched both states, exhaustively. Neither state addresses directly the resident/nonresident issue. VA does not allow retirement income to be subtracted from the federal amount unless it is being taxed by another state. Maryland as no provision for adding retirement income for a nonresident.
Kind of sounds like I answered my own question there, I was just hoping a VA tax pro would have some input. Logic makes me think it is unreasonable for a VA resident de taxed on income received as a nonresident.
Thanks,

Nancy Tomlinson EA

[rbynaker]

I'm in VA and I don't know the answer.  (Note to self: I'm so happy I don't have any clients who did this 3-year spread!)

I would think this would still be MD source income since it was MD source when the actual transaction occurred and the IRC just spreads the taxation over three years.  But I haven't seen anything from either side of the Potomac that would clarify this.

@sjrcpa may know to MD tax ramifications.

Rick

[sjrcpa]

What Rick said seems logical. (But logic doesn't have to apply to taxes.)

I don't know the answer. I only had 2 clients take advantage of this deferral and they did not move.

[qbteachmt]

"VA does not allow retirement income to be subtracted from the federal amount unless it is being taxed by another state. Maryland as no provision for adding retirement income for a nonresident.
Kind of sounds like I answered my own question there"

Yes, it does.

"Logic makes me think it is unreasonable for a VA resident de taxed on income received as a nonresident."

I don't see why you would think this. There are States that use Federal income, and there are States that use Resident's income. Most times, 401(k) as employer-related, would be considered a Sourced retirement; or a public pension is Sourced. IRA is "individual" and not sourced. Source isn't always applicable. Example: I am in Montana. A CA resident hits the CA lottery, which would not be taxable in CA, if they stayed in CA. They move to MT. MT taxes all of it, because this is their income and they are MT residents.

"He is a full year resident of VA for 2021."

"Social Security retirement benefits are not taxed in Virginia. Other types of retirement income, such as pension income and retirement account withdrawals, are deductible up to $12,000 for seniors."

https://smartasset.com/retirement/virginia-retirement-taxes

[NancyT]

Thank you! 
Sometimes it helps to just put it in writing and stop muddling things with my inner tax nerd. You know, the one that wakes you up and 2:00 am.

[qbteachmt]

Well, the good news seems to be that there is no MD filing or tax.

[sjrcpa]

I don't think this settles it. They received 100% of it in 2020 while they were a MD resident. Due to COVID related benefits, they do not have to pay tax on the remaining 2/3 until 2021 and 2022.

[NancyT]

Yes, and I am now preparing the 2021 return to report the 2nd 1/3. I think the respondents on the board have been very helpful, and it will be VA income. Uncharted territory here!

[sjrcpa]

Of course its taxable in VA. VA taxes residents on all their income. The unanswered, as far as I'm concerned, question is whether it is also subject to MD tax since it was received while they were a MD resident.

[NancyT]

That’s my conundrum - is it taxable as MD non-resident income and then removed from VA income as “being taxed by another state”.?

And I understand that VA residents are taxed on all their income, BUT that income was constructively received when they were not residents of VA. I don’t think this is clear cut.

it’s a new law, hastily constructed by Congress in the middle of a pandemic, and untested.

I respect everyone’s opinions, just wish I could find a good written reference for the proper tax treatment.

[qbteachmt]

Reporting Vs Deferred: We saw this for the SE Tax, where the Tax was deferred, but the Income was all reported. It wasn't really a confusion, but to some preparers, they though they had to include the income somewhere, again.

I found this one reference for MD: "Reported as taxable the year of distribution, but, unless the participant elects immediate taxation, taxed ratably to the participant as ordinary income over three years"

From "MARYLAND STATE RETIREMENT AND PENSION SYSTEM
IMPORTANT NOTICE
OPTIONAL RETIREMENT PROGRAM"

And it's a pdf; now I lost the link. Sorry.

[sjrcpa]

"then removed from VA income as “being taxed by another state"

If it is taxed by MD they would get a credit on their VA return for tax paid to MD.

[rbynaker]

---

@NancyT wrote:

That’s my conundrum - is it taxable as MD non-resident income and then removed from VA income as “being taxed by another state”.?

---

If it is taxable as MD source income it would still be taxable in VA to a VA resident but there would be an other-state-credit (OSC) rather than a subtraction.  VA starts with federal AGI which would include the 1/3.  So tax would be calculated on that basis, then the credit calculated based on the portion of VA income that's taxable in MD.

What we don't know is whether this is MD source.  I can see it both ways.  You might try calling MD DoR to see if they have an opinion.

Rick

[NancyT]

Thanks, Rick. I think you’re seeing the issue the way I am. Plan to call both states tomorrow.