1099R & PA State Distribution Amount

[Crank]

IRA distributions are not taxable in PA (Including the earnings if distributed after 59 1/2) since the contributions weren't deductible. Client had a 1099R with an amount in the State Distribution box which I excluded from income on the original return. Client got a notice from PA revising the return to include the amount in income.

What the proper way to handle this? Should we start with the 1099R issuer to get it corrected or respond to the state first?

Thanks

[jainen]

>>Should we start with the 1099R issuer to get it corrected or respond to the state first?<<

Neither. In my experience, it is far more likely that the tax return was filed incorrectly than that either the issuer or the state is wrong. In what way was the IRA "excluded from income on the original return"? I'm not familiar with Pennsylvania procedures, but at least according to the instructions to Schedule W-2S you are not allowed to exclude IRA distributions, but must report them even if they are exempt.

[elfling]

Crank,

Where did you get the idea that IRA distributions are not taxable in PA? Currently, IRA distributions are taxable "to the extent the distribution exceeds your previous contributions." (PA40 instr, pg 13) A good chunk of retirement money is taxable here now. Our state congress saw fit to change the tax code in late 2005 as a way to increase money coming in. A number of the changes make no sense at all, which is relatively normal here. Logic is a foreign concept for most of our state legislators.

You can't just exclude the distribution. On W2-S, if i applies, you can use column F to enter the adjusted plan basis if that applies. Even then sometimes the state will not honor the adjustment and documentation to prove the basis is hard to come by for some of these plans given the tp little ammunition to argue with the state. PA has become a bully of sorts in this matter.

For the most part, the code in 1099-R box 7 is what to go by when working with retirement issues in PA.

Here is a link to the tax guide:

http://www.portal.st...tax_guide/14826

Choose chapter 7. Check out the code information starting on page 7-66.

Elfling