Thrift Savings Plan retirement distributions exemption from NYS Income Tax
Facts:
The Thrift Savings Plan 401 type retirement plan for FERS Federal employees (and CSRS employees) electronically transferred entire balance of deceased spouse’s balance to an IRA in my name at Charles Schwab amounting to close to $343K in 2020.
Shortly afterward (still in 2020) I converted $50K to an individual Roth IRA also at Schwab.
With regard to NYS tax returns since spouse’s retirement in 2013 he never took the TSP RMD distributions as federal pension distributions on our NYS income tax returns based on the lack of knowledge that they were considered “part of the federal pension” which is now indicated as accepted by New York State in their advisory opinions based on my interpretation or opinion. (Complicating factor is that in October of 2008, spouse transferred slightly over $56K from a 401 type retirement plan from a previous nongovernmental employer into the TSP. At 12/31/2008, that contribution represented 25% of the balance in his TSP account. So each year beginning in 2014 we paid full NYS income tax on RMDs from the Thrift Savings Plan (spouse had other retirement distributions that already maxxed out his 20K NY Pension/IRA deduction).
Now, quite by accident, I have learned that some NY federal retirees have asked for and received advisory opinions from the NYS Income Tax Dept. regarding their particular tax situations which allow them to claim portions of their distributions as part of their federal pension exemption amounts on their NYS Income Tax Returns. (My circumstances do not match up exactly because of the addition in 2008 of the nongovernmental retirement plan transfer into the TSP of approximately $56K+).
See the following advisory opinions from the NYS Income Tax Dept.
— TSB-A-20(9)I Income Tax October 6, 2020 (deals with TSP Funds transferred to IRAs)
— TSB=A-15(6)I Income Tax July 15, 2015 (deals with TSP being considered of the 3 legged retirement plan)
Needing to file income returns for 2020 for myself and deceased spouse (have extension) what do I do? The Schwab IRA in my name containing the balance transferred, I believe, should allow for a NY federal pension deduction of 75% of the 50K or $37,500 subtracted as Federal pension income from the NYS tax return. (In terms of earnings for that account for the year 2020, on the entire balance it had a $1.31 earnings or dividends or practically 0.
How do I report for NYS — simply add $37,500 to his and my federal annuity distribution subtraction amount on IT Form 201 line 26 to obtain the federal pension deduction? Or should I file the old way meaning doing nothing and paying the approximate 6% income tax or approximately $2250 of tax now and ask for an advisory opinion and then file an amended return if receiving a favorable answer from the NY State Tax Department? Either way I will be receiving a refund as I had more than sufficient NYS Income Tax withheld or estimated applied from 2019 NYS tax refund.
Previously I tried calling the NYS Tax Dept. but the person I spoke with was unfamiliar with what I was talking about and I did not get a feeling that he understood or knew about those advisory opinions.
At the bottom of each advisory opinion is a statement about the opinion being binding only with respect to the person to whom it was issued.
I am worried about the potential complications if I do nothing now and then go through a long complicated process of getting an advisory opinion. My return for 2020 will be a joint return “Filing as surviving spouse,” while next year’s will be filing as “single.”
Any advice will be much appreciated.
Permalink Submitted by Alan - IRA critic on Wed, 2021-10-13 22:16
The opinion is very clear, so I would not be concerned with the boilerplate warning about the opinion only applying to the applicant. You should make the appropriate subtraction from NYS income but you may need a paper trail to support it and a calculation to back out the rollover he did into the TSP. Of course, the spousal rollover to your IRA was not taxable, but your conversion is, and a calculated portion of the conversion should be non taxable for NYS. Retain or try to obtain a final TSP statement to indicate the amount, pro rate it to 75%, and then further pro rate the 37,500 portion of the year end 2020 adjusted TIRA balance. You could not subtract in any single year more than the portion of all IRA distributions including conversions and RMDs if any, that are sourced to the TSP money. For example, if all your IRAs including those you already own added up to 750,000, then only 5% of the 50,000 converted distribution should be subtracted, which is only 2,500. You would have to spread out the subtractions over several years, you could not assume that the first 37,500 distributed was all attributed to the TSP balance. Therefore, the extension of this subtraction to IRA accounts where it represents only a small portion of the IRA departs from the usual exclusion of a plan’s entire payment.
There must be many gray areas in NYS Pub 36 that have just been left to evolve without a new Pub being issued with enough supporting details. This advisory opinion is just the latest, and while it is clear that a subtraction is allowable, there is no guidance on how to calculate the correct amount, to document it, or to report it on the NYS return.
I have no opinion whether an amended joint return for 2018 and 2019 (still open years) to claim the subtraction would fly.