If I already paid another state's income tax on my IRA contributions, does Utah tax that same money again when I withdraw it?

Plain-English summary

A couple wrote to the Utah State Tax Commission after getting no clear answer from the Commission's own phone line. While living in another state ("STATE" in the redacted ruling), they had contributed to IRA accounts. Their federal return let them deduct those contributions, but that other state did not allow the deduction, so they paid state income tax on all the money they put into the IRAs. Years later, now Utah residents, the husband turned 70½ and they took the required minimum distribution for the year. They asked the Commission whether Utah would tax that same withdrawn money again, and if so, how to claim a deduction on their Utah return.

The Commission explained that federal law lets a person defer tax on money placed into an IRA until it's withdrawn, and Utah's income tax law mirrors that federal approach — so IRA withdrawals are generally subject to both federal and Utah state income tax in the year withdrawn. The couple couldn't use Utah's ordinary credit for taxes paid to another state (§ 59-10-106) because that credit only applies when the other state taxed the income in the same taxable year; here, the other state had taxed the contributions in earlier years, not the year of withdrawal.

Instead, the Commission relied on § 59-10-115(1), which lets it make an "equitable adjustment" to a taxpayer's Utah taxable income when an item was already taxed by a state in a prior year, to prevent that item from being taxed a second time. Because the couple's contributed funds had already been taxed once by the other state, the Commission ruled that Utah would allow an equitable adjustment on withdrawal — but only for the portion of the IRA representing those already-taxed contributions, not for the investment growth the account had earned over the years, which no state had ever taxed.

Since contributions and growth aren't tracked separately within the IRA, the Commission adopted an administrative ordering rule: previously-taxed contributions are treated as the first funds withdrawn. So withdrawals are excluded from Utah tax (via the equitable adjustment) up to the total amount of previously-taxed contributions; only after that cumulative total is withdrawn does further withdrawal become taxable by Utah.

What this means for you

Retirees and IRA holders who moved to Utah

If you contributed to an IRA while living in a state that didn't allow a deduction for those contributions (so you paid that state's income tax on the money going in), and you're now withdrawing from that IRA as a Utah resident, you may be able to claim an "equitable adjustment" under § 59-10-115(1) so Utah doesn't tax that same money again. This only shelters the amount of previously-taxed contributions — investment earnings and growth inside the IRA have never been taxed anywhere and are fully taxable by Utah when withdrawn. The Commission's ordering rule treats your already-taxed contributions as coming out first, so track your cumulative withdrawals against your total previously-taxed contribution amount.

Preparing your Utah return

The ruling describes a specific documentation and filing process: file the TC-40 and enter the equitable adjustment amount on line 18 ("Other" deductions), labeled "equitable adjustment," reflecting the current year's IRA withdrawal amount that has already been taxed (subject to the ordering rule above). Attach (1) a copy of the ruling letter, (2) copies of the federal returns for the years the other state's contributions were made, showing the federal deduction claimed, and (3) copies of the other state's income tax returns for those same years, showing no deduction was allowed there. This lets the Commission's Auditing Division track previously-taxed contributions against equitable adjustments claimed in future years.

Accountants and tax professionals

Note the distinction the Commission draws between § 59-10-106 (credit for tax paid to another state in the same year — unavailable here because the other state's tax was paid in earlier years) and § 59-10-115(1)'s equitable adjustment (available because the same income would otherwise be taxed twice across different years/states). This ruling is nearly three decades old; confirm the current numbering and text of Utah's IRA/equitable-adjustment provisions and current TC-40 line instructions before advising a client, since forms and statute numbering change over time.

Common questions

Q: I paid state income tax on my IRA contributions in another state years ago. Does Utah tax that money again when I withdraw it now?
A: Under this ruling, no — the Commission allows an "equitable adjustment" so previously-taxed contributions aren't taxed by Utah a second time. Investment growth on those contributions, however, has never been taxed and remains taxable by Utah on withdrawal.

Q: Can I use Utah's credit for taxes paid to another state instead?
A: Not for this situation. That credit (§ 59-10-106) applies only when another state taxed the income in the same taxable year. Here the other state taxed the contributions in prior years, so the ordinary credit doesn't apply — the equitable adjustment under § 59-10-115(1) is the relief mechanism instead.

Q: How do I know which part of my withdrawal is "already taxed" contributions versus growth?
A: The Commission's approach treats your previously-taxed contributions as the first funds withdrawn. So you count withdrawals against your total previously-taxed contribution amount; once that cumulative total is used up, further withdrawals are fully taxable by Utah.

Q: What paperwork do I need to claim this?
A: Per the ruling, you'd file a TC-40, note the equitable adjustment on line 18, and attach a copy of the ruling, your federal returns for the contribution years (showing the federal deduction), and your other state's returns for those years (showing no deduction was allowed there). Confirm current TC-40 instructions, as forms may have changed since 1999.

Q: Can I rely on this ruling for my own situation?
A: Not as binding precedent. A Utah private letter ruling binds the Commission only for the taxpayer and facts it was issued to. This is also one of the Commission's older rulings, and Utah Code sections have been renumbered and amended repeatedly since 1999, so verify current law before relying on it.

Citations and references

Statutes (Utah Code Ann., as cited in 1999):

• § 59-10-106 — credit against Utah income tax for income tax paid to another state in the same taxable year (found not to apply here)
• § 59-10-115(1) — requires the Commission to make "equitable adjustments" to a taxpayer's state taxable income to prevent double taxation of an item already taxed in a prior year
• § 59-10-115(4) — gives the Commission broad powers to administer such adjustments

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/98-079.htm

Original ruling text

98-079

Response January 4, 1999

REQUEST LETTER

Dear Irene Rees,

We called the 800 number for the State Tax commission
with a question. We talked to four different people and none of them seemed to
know the answer. A person named NAME
gave us your address and told us to write to you.

While living in STATE we put money into I.R.A.
accounts. On our joint federal return we were allowed to deduct the money we
put in and therefore did not pay federal taxes on it. The state of STATE did not allow that money as a deduction and
therefore we paid state tax on all the money we put into our I.R.As. My husband is now 70 2 and we have withdrawn the required amount for this
year. We don not want to pay tax in two
states on the same money. Can you tell
us how to enter that as a deduction on the Utah state tax form.

Thank you for your help

NAME

RESPONSE
LETTER

January 4, 1999

NAME

ADDRESS

RE: Advisory
Opinion - Taxation of IRA Withdrawals

Dear NAME,

We have received your request for an advisory opinion
concerning the taxation of funds withdrawn this year from your Individual
Retirement Account (AIRA@). You state that you were a resident of STATE
at the time the IRA was funded and that STATE law at that time did not allow
you to deduct any IRA contributions when calculating your state income taxes. Assuming this to be the case, you paid state
income taxes to STATE on all funds that were contributed to the IRA. You now ask if state income taxes must be
paid to Utah on these same funds as they are withdrawn.

For federal income tax purposes, the Internal Revenue
Code allows a person to defer the taxation of income placed into an IRA until
the time he or she withdraws those funds from the IRA. Utah=s
income tax laws mirror this federal approach.
Accordingly, for amounts you withdraw from your IRA this year, the funds
are subject not only to federal taxation, but also to state income taxation in
Utah.

Utah Code Ann '59-10-106
allows a credit against the income taxes due this year in Utah equal to the
amount of income taxes imposed by another state for the same taxable year. As STATE imposed taxes on your IRA in prior
years, not this same year, this particular statutory credit is not available.

Nevertheless, Utah Code Ann. '59-10-115(1) provides that:

...if such item [of gross income] has been taken into
account in computing the taxable income of the taxpayer for state income tax
purposes for any prior taxable year, the commission shall make or allow such
adjustments to the taxpayer's state taxable income as are necessary to prevent
the inclusion for a second time ... of such item for state income tax purposes.

This section provides for an Aequitable adjustment@ to Utah taxable income in those circumstances where a taxpayer would
be taxed twice on the same income.
Subsection 115(4) also gives broad powers to the Commission concerning
such situations. The funds you
contributed to your IRA have already been taxed by STATE. Accordingly, when the funds upon which you paid
STATE state income taxes are withdrawn, Utah will allow an Aequitable adjustment@ to your Utah taxable income.

However, your IRA today contains not only the funds
you contributed, but also funds representing the appreciable growth generated
over the years by the contributed funds.
While the contributed funds have already been taxed once by STATE, the
funds representing appreciable growth have not been taxed by any state. Thus, when you make a withdrawal from your
IRA, Utah will allow an Aequitable adjustment@ only for those funds you contributed, not for those funds representing
the appreciable growth. As both these
categories of funds are not separately accounted for in the IRA nor separately
withdrawn, we must decide how to differentiate between the two for purposes of
the Aequitable adjustment.@ For ease of administration, we
have decided that the funds you contributed and that were taxed by STATE will
be the first funds withdrawn. Thus,
only after you withdraw a total amount of funds equal to the total previously
taxed amounts you contributed will further withdrawals be subject to Utah
taxation.

To claim the Aequitable
adjustment@ on your tax return, you will need to submit the TC40
income tax return and indicate the amount of the Aequitable adjustment@ on line 18 of
that form, which is the line where AOther@ deductions from taxable income are claimed. To do this, check line 18, write in Aequitable adjustment,@ then enter the amount of the current year=s IRA withdrawal on which taxes have already been paid
subject to the criteria above. In order
to receive the deduction, please attach to the TC40 the following information:

1) a copy
of this letter;

2) for
the years you paid STATE state income taxes on IRA contributions, a copy of all
federal income tax returns that will show a deduction from federal taxable income
for the contributed amounts; and

3) for
these same years, a copy of your STATE state income tax returns that will show
no deductions from STATE taxable income for the contributed amounts.

With this information, Auditing Division can track the
amount of IRA contributions on which you paid STATE state income tax against
the amount of Aequitable adjustments@ you claim on your future Utah income tax returns.

Please contact us if you have any other questions.

For the Commission,

Joe B. Pacheco, CPA

Commissioner

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