On August 17, 2006, the U.S. Congress enacted the Pension Protection Act of 2006, Public Law 109-280 ("Act"), which provides a new federal exclusion from income for distributions from individual retirement accounts ("IRAs") for charitable purposes under section 408(d)(8) of the Internal Revenue Code ("Code" or "IRC"). This Technical Information Release ("TIR") announces that for personal income tax purposes Massachusetts adopts the federal exclusion for IRA distributions to qualifying charities. This TIR also explains the interaction between the adoption of IRC § 408(d)(8) and the Massachusetts treatment of distributions of IRA contributions that were previously subject to the Massachusetts personal income tax.

I. Income Exclusion for Distributions from IRAs for Charitable Purposes

The Act provides for an exclusion from federal gross income for distributions from traditional and Roth IRAs to qualified charities that would otherwise be taxable distributions. IRC § 408(d)(8). The exclusion applies to distributions made by taxpayers who are at least 70 ½ on the date of distribution in 2006 or 2007 up to a maximum of $100,000 per year. Id. The exclusion applies only to "traditional" and Roth IRAs and does not apply to Simplified Employee Pension plans, SIMPLE plans, Keoghs, or any other retirement plan such as an IRC § 401(k), 403(b), defined benefit or contribution plan or profit sharing plan. IRC § 408(d)(8)(B).

II. Massachusetts Adoption of IRC § 408(d)(8)

For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. M.G.L. c. 62, § 1(c). One of the Code sections included as an exception and adopted based on the Code as amended and in effect for the taxable year is IRC § 408 (exclusive of IRC § 408(q)). Id. Therefore, Massachusetts adopts the new IRC § 408(d)(8) provision allowing an exclusion from gross income for distributions from traditional and Roth IRAs even though the provision was enacted after January 1, 2005.

Example: The Taxpayer has a traditional IRA that has a balance of $100,000. The traditional IRA is a rollover IRA consisting of $80,000 of previously federally excluded IRC § 401(k) plan contributions and $20,000 of accrued earnings. The IRC § 401(k) plan was rolled over into the traditional IRA that was created for the purpose of accepting the rollover from the IRC § 401(k). There were no other contributions to the traditional IRA. Therefore the traditional IRA balance is $100,000, consisting of $80,000 of previously federally excluded IRC § 401(k) plan contributions and $20,000 of accrued earnings. For Massachusetts purposes, $80,000 constitutes § 401(k) plan contributions previously excluded from income. The Taxpayer has no other IRA. The Taxpayer directs the IRA administrator to distribute the $100,000 to a charity.

Federal and Massachusetts Treatment of IRA Distribution to Charity:

The entire $100,000 distribution to charity is excluded from federal and Massachusetts gross income. IRC § 408(d)(8)(D); M.G.L. c. 62, § 1(c).

III. Interaction Between Adoption of IRC § 408(d)(8) and the Massachusetts Treatment of IRA Contributions Previously Subject to the Massachusetts Personal Income Tax

Massachusetts has a specific statute that does not allow a personal income tax deduction for contributions to an IRA regardless of an allowable federal deduction for such contributions. M.G.L. c. 62, § 2(d)(1)(F). To prevent double taxation of any previously taxed contributions upon distribution from the IRA, Massachusetts has a specific statute that permits taxpayers receiving distributions to first recover those contributions tax free, by reducing gross income for IRA distributions up to the aggregate amount of previously taxed contributions. M.G.L. c. 62, § 2(a)(2)(F). [1] The following examples illustrate the interaction of c. 62, § 2(a)(2)(F) and the newly adopted federal exclusion for IRA distributions to qualified charities:

Example 1 - Year 1: The Taxpayer has a traditional IRA with a balance of $100,000, consisting of $20,000 of federally nondeductible contributions, $30,000 of federally deductible contributions and $50,000 of accrued earnings. For Massachusetts purposes, $50,000 constitutes contributions previously taxed in Massachusetts. The Taxpayer has no other IRA. The taxpayer receives a regular (non-charitable) distribution of $80,000.

Federal Treatment of Regular IRA Distribution:

A portion of the distribution from the traditional IRA is treated as a nontaxable return of nondeductible contributions. IRC § 408(d)(1),(2). The nontaxable portion of the distribution is $16,000, determined by multiplying the amount of the distribution ($80,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Id. Therefore, $64,000 of the distribution ($80,000 minus $16,000) is included in the Taxpayer's federal gross income. Id. [2]

Massachusetts Treatment of Regular IRA Distribution:

Of the $80,000 in IRA distributions, the Taxpayer has $30,000 in Massachusetts gross income after reducing gross income by $50,000 of the IRA distributions on account of the contributions previously taxed in Massachusetts. M.G.L. c. 62, § 2(a)(2)(F).

Example 1 - Year 2: The Taxpayer receives the remaining balance of $20,000 from the traditional IRA.

Federal Treatment of Regular IRA Distribution:

Of the $20,000 distribution, $4,000 is nontaxable and $16,000 is included in federal gross income. IRC § 408(d)(1),(2).

Massachusetts Treatment of Regular IRA Distribution:

The Taxpayer has no remaining balance of contributions previously taxed in Massachusetts. Therefore the entire $20,000 distribution is included in Massachusetts gross income.

Example 2 - Year 1: The Taxpayer has a traditional IRA with a balance of $100,000, consisting of $20,000 of federally nondeductible contributions, $30,000 of federally deductible contributions and $50,000 of accrued earnings. For Massachusetts purposes, $50,000 constitutes contributions previously taxed in Massachusetts. The Taxpayer has no other IRA. The Taxpayer directs the IRA administrator to distribute $80,000 to a charity.

Federal Treatment of IRA Distribution to Charity:

The entire $80,000 distribution to charity is excluded from federal gross income. IRC § 408(d)(8)(D). [3]

Massachusetts Treatment of IRA Distribution to Charity:

The Taxpayer reduces gross income by $50,000 of the IRA distribution on account of the contributions previously taxed in Massachusetts. M.G.L. c. 62, § 2(a)(2)(F). The remaining $30,000 of the $80,000 IRA distribution is excluded from gross income as a qualifying distribution to charity under IRC § 408(d)(8).

Example 2 - Year 2: The Taxpayer receives the remaining balance of $20,000 from the traditional IRA. This is not a distribution to a qualifying charity. It is a regular distribution that occurs after the Taxpayer directed the administrator to distribute the $80,000 to a charity in Year 1.

Federal Treatment of Regular IRA Distribution After Charity Distribution:

Under the Act, a new provision allows IRA distributions to qualified charities to be treated as consisting of income first with no proportionate reduction in the Taxpayer's nondeductible contributions. Therefore, the entire $20,000 distribution in Year 2 is treated as the Taxpayer's remaining balance of nondeductible contributions and therefore is excluded from federal gross income. IRC § 408(d)(8)(D). [4]

Massachusetts Treatment of Regular IRA Distribution After Charity Distribution:

The Taxpayer has no remaining balance of previously taxed contributions. Therefore the entire $20,000 distribution is included in Massachusetts gross income.

Example 3: The Taxpayer has a traditional IRA with a balance of $100,000, consisting of $20,000 of federally nondeductible contributions, $30,000 of federally deductible contributions and $50,000 of accrued earnings. For Massachusetts purposes, $50,000 constitutes contributions previously taxed in Massachusetts. The Taxpayer has no other IRA. The Taxpayer directs the IRA administrator to distribute the entire $100,000 balance to charity.

Federal Treatment of IRA Distribution to Charity:

The entire $100,000 distribution to charity is excluded from federal gross income. IRC § 408(d)(8)(D). [5]

Massachusetts Treatment of IRA Distribution to Charity:

None of the $100,000 distribution to charity is in Massachusetts gross income. The Taxpayer reduces gross income by $50,000 of the IRA distribution on account of the contributions previously taxed in Massachusetts. M.G.L. c. 62, § 2(a)(2)(F). The remaining $50,000 is excluded from Massachusetts gross income under IRC § 408(d)(8)(D) and M.G.L. c. 62, § 1(c).

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

AL:MTF:jmw

November 17, 2006

TIR 06-20


[1] The statute reads in relevant part: "The items to be deducted therefrom [in determining Massachusetts gross income] are: - (F) Income from … individual retirement accounts, individual retirement annuities … described in [§ 408] … of the Code, until an aggregate amount of such income has been deducted under this subparagraph equal to the aggregate of all amounts previously subject to taxation …".

[2] There is a similar example in the Committee Reports, Pension Protection Act of 2006, P.L. 109-280, 8/17/2006 ("Committee Reports").

[3] See Committee Reports, supra note 2 (including a similar example).

[4] See Committee Reports, supra note 2 (including a similar example).

[5] See Committee Reports, supra note 2 (including a similar example).