Massachusetts State Taxes on Distributions

[Guest CHRISTA]

Wondering if anyone knows or has heard the following:

New law effective 3/1/01 states that a distribution for under $8,000 does not require MA state tax to be withheld.

Any guidance would be appreciated. Thanks!

[Appleby]

The Massachusetts law states "If your gross income was less than $8,000, it is not necessary for you to file a return" and the income is not subjected to state tax withholding. It would follow then that distributions under $8,000 are not subjected to taxes including withholding. The issue for the custodian or trustee then becomes, "how do they know if the individual's gross income is less than $8,000? The MA State law requires the custodian to withhold state taxes, if the individual has requested federal withholding. To avoid the state tax withholding, the individual must waive out of federal tax withholding

[AndyH]

Appleby, sorry, but I'm not following your logic. Can we try that one again?

Which part of your answer was in the law, and which was your interpretation of the implications?

I was unaware of such a law change, am also interested in the answer. Thanks.

[Appleby]

The "and" after the first quote should be 'as'- sorry about that.

Let's see if I can make more sense.

According to Massachusetts State law, if your gross income for the year is $8,000, then such income is not subjected to state income tax. Therefore, since you will definitely pay no taxes, it is not necessary to file a state income tax return.

Distributions from your retirement account are treated as income and are included in the gross income for the year. However, your IRA custodian or plan trustee will have no way of knowing if:

The $8,000 is your only income for the year or

If this is the only distribution you have taken or will take for the year.

Therefore, they must perform the withholding, as stated by the law.

According to Massachusetts state law, if you take a distribution from your IRA, state taxes MUST be withheld (at a rate of 5.6% for year 2001), IF you request to have federal taxes withheld. (The withholding rate for QRPs is different and a little more complex) The only way to avoid the state income tax withholding on a distribution then is to waive out of the federal income tax withholding.

I really hope this makes more sense. If not- let me know

This link will take you to the year 2000 guide for filing you Massachusetts income tax return

http://www.dor.state.ma.us/publ/pdfs/tx_gd00.pdf

[AndyH]

Thanks for the clarification and the link. I'll check the guide, but would you know if the rules which you've cited for IRA withholding are the same as for qualified plan withholding? I wouldn't think that they would have to be the same.

I understood that Mass state withholding was mandatory for a lump sum distribution, not something that could be waived. Is this incorrect, or has it changed?

[Appleby]

Payments or distributions subject to federal withholding from an employer deferred compensation plan, an individual retirement plan, or commercial annuity are generally subject to Massachusetts withholding. However, if the recipient has elected against federal withholding under IRC Sec. 3405(a)(2) or 3405(B)(3), the payments are not subject to Massachusetts withholding". This rule is still in effect.

The rules for withholding on a QRP are different from those for an IRA. The IRA is straight 5.6 %(for year 2001)- the QRP withholding is determined based on whether the distribution is a 'periodic' or 'nonperiodic' payment. For non-periodic payments, the withholding rate is similar to IRAs (5.6 %). Section 3405(a)(1) of the Code provides that "[t]he payor of any periodic payment (as defined in subsection (d)(2)) shall withhold from such payment the amount which would be required to be withheld from such payment if such payment were a payment of wages by an employer to an employee for the appropriate payroll period." The Massachusetts withholding rules borrows from this Code section

The Massachusetts state withholding would be mandatory, only if the distribution was rollover eligible and the participant choose to have the assets paid to him/her directly. The 20-% mandatory would then apply and thus the Massachusetts state withholding

[AndyH]

Thank you very much.