98-079
Response January 4, 1999
REQUEST LETTER
Dear Irene Rees,
We called the 800 number for the State Tax commission
with a question. We talked to four different people and none of them seemed to
know the answer. A person named NAME
gave us your address and told us to write to you.
While living in STATE we put money into I.R.A.
accounts. On our joint federal return we were allowed to deduct the money we
put in and therefore did not pay federal taxes on it. The state of STATE did not allow that money as a deduction and
therefore we paid state tax on all the money we put into our I.R.As. My husband is now 70 2 and we have withdrawn the required amount for this
year. We don not want to pay tax in two
states on the same money. Can you tell
us how to enter that as a deduction on the Utah state tax form.
Thank you for your help
NAME
RESPONSE
LETTER
January 4, 1999
NAME
ADDRESS
RE: Advisory
Opinion - Taxation of IRA Withdrawals
Dear NAME,
We have received your request for an advisory opinion
concerning the taxation of funds withdrawn this year from your Individual
Retirement Account (AIRA@). You state that you were a resident of STATE
at the time the IRA was funded and that STATE law at that time did not allow
you to deduct any IRA contributions when calculating your state income taxes. Assuming this to be the case, you paid state
income taxes to STATE on all funds that were contributed to the IRA. You now ask if state income taxes must be
paid to Utah on these same funds as they are withdrawn.
For federal income tax purposes, the Internal Revenue
Code allows a person to defer the taxation of income placed into an IRA until
the time he or she withdraws those funds from the IRA. Utah=s
income tax laws mirror this federal approach.
Accordingly, for amounts you withdraw from your IRA this year, the funds
are subject not only to federal taxation, but also to state income taxation in
Utah.
Utah Code Ann '59-10-106
allows a credit against the income taxes due this year in Utah equal to the
amount of income taxes imposed by another state for the same taxable year. As STATE imposed taxes on your IRA in prior
years, not this same year, this particular statutory credit is not available.
Nevertheless, Utah Code Ann. '59-10-115(1) provides that:
...if such item [of gross income] has been taken into
account in computing the taxable income of the taxpayer for state income tax
purposes for any prior taxable year, the commission shall make or allow such
adjustments to the taxpayer's state taxable income as are necessary to prevent
the inclusion for a second time ... of such item for state income tax purposes.
This section provides for an Aequitable adjustment@ to Utah taxable income in those circumstances where a taxpayer would
be taxed twice on the same income.
Subsection 115(4) also gives broad powers to the Commission concerning
such situations. The funds you
contributed to your IRA have already been taxed by STATE. Accordingly, when the funds upon which you paid
STATE state income taxes are withdrawn, Utah will allow an Aequitable adjustment@ to your Utah taxable income.
However, your IRA today contains not only the funds
you contributed, but also funds representing the appreciable growth generated
over the years by the contributed funds.
While the contributed funds have already been taxed once by STATE, the
funds representing appreciable growth have not been taxed by any state. Thus, when you make a withdrawal from your
IRA, Utah will allow an Aequitable adjustment@ only for those funds you contributed, not for those funds representing
the appreciable growth. As both these
categories of funds are not separately accounted for in the IRA nor separately
withdrawn, we must decide how to differentiate between the two for purposes of
the Aequitable adjustment.@ For ease of administration, we
have decided that the funds you contributed and that were taxed by STATE will
be the first funds withdrawn. Thus,
only after you withdraw a total amount of funds equal to the total previously
taxed amounts you contributed will further withdrawals be subject to Utah
taxation.
To claim the Aequitable
adjustment@ on your tax return, you will need to submit the TC40
income tax return and indicate the amount of the Aequitable adjustment@ on line 18 of
that form, which is the line where AOther@ deductions from taxable income are claimed. To do this, check line 18, write in Aequitable adjustment,@ then enter the amount of the current year=s IRA withdrawal on which taxes have already been paid
subject to the criteria above. In order
to receive the deduction, please attach to the TC40 the following information:
1) a copy
of this letter;
2) for
the years you paid STATE state income taxes on IRA contributions, a copy of all
federal income tax returns that will show a deduction from federal taxable income
for the contributed amounts; and
3) for
these same years, a copy of your STATE state income tax returns that will show
no deductions from STATE taxable income for the contributed amounts.
With this information, Auditing Division can track the
amount of IRA contributions on which you paid STATE state income tax against
the amount of Aequitable adjustments@ you claim on your future Utah income tax returns.
Please contact us if you have any other questions.
For the Commission,
Joe B. Pacheco, CPA
Commissioner
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