state taxation of 1099R code P

[Kram BergGold]

My client has to amend his 2006 return to report $11,000 from a 2007 1099 with a box 14 code of P. In 2006 he was a part year resident of DC for the first 3 months of the year and then a RI resident the rest of the year. There is no withholding and the state box is marked DC. Although the income was earned in DC my thinking is, if he recieved the money after hbe left DC I would tax it in RI only. Any thoughts?

[erchess]

The one thing I am sure of

is that because DC is on the form, DC will try to get you to make the money at least partially taxable to DC. Before I decided what to do I would want to know WHY the form says DC. I can think of several possibilities and they're perhaps not all mutually exclusive. The firm could be located in DC. The work that earned the pension could have been done in DC. There could have been a mistake made by someone in payroll and accounting. Anyway time spent thinking about this rather than acting in haste could mean less trouble later.

[Roland Slugg]

It's always better to handle these add-back's on the original year's returns, but, alas, our clients don't always tell us about them, or find out themselves, until after their returns are filed.

What I'd do in the case you described is allocate the $11,000 add-back between DC and RI in the same ratio as the client's wages were reported on the original DC and RI returns.

[Nashville]

Exempt Income

Many custodial firms simply issue the "state taxable" line to the same state as the address of the recipient.

Every year, for example, I see dozens of 1099-Rs which indicate "TN" on the state income line, and Tennessee doesn't even tax retirement at all. I suspect the same thing is happening in FL, TX and other states without an income tax.

Other states have income taxes but exempt many kinds of retirement income, even one-time distributions. For example, in Alabama, any 1099-R received from TIAA./CREF is tax-exempt.

A dead give-away that a 1099-R is not taxable to a given state might be a conventional IRA distribution to a taxpayer living in a state which did not allow a deduction for an IRA to begin with. Another situation that is often not taxable is retirement distribution or income from the state employment itself. Government employees in many states are often in a position to get the state to exempt their own retirement - a measure immensely popular inside the hallowed halls of government.

Never have seen a 1099-R indicate where the personal service income was earned. Federal Office of Personnel Management will not even withhold state tax unless requested to do so by the recipient.