Discussion:Michigan pension subtraction problem
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Discussion Forum Index --> Advanced Tax Questions --> Michigan pension subtraction problem
Discussion Forum Index --> Tax Questions --> Michigan pension subtraction problem
| 14 May 2008 | |
| The latest audit I've gotten is for a 401(k) early distribution. The taxpayer is 43 and took an early distribution from his 401(k). No exception to the penalty for federal. The MI instructions say 401(k) distributions are deductible to the extent they are 'attributable to employer contributions or attributable to employee contributions to the extent they result in matching contributions by the employer', but then goes on to say you can't subtract amounts from a deferred comp plan that lets the employee set the amount to be put aside and does not set retirement age or requirements for years of service, including 401K plans.
So does this mean you can deduct the fraction of a 401(k) distribution that can be traced to employer contributions or employee matching contributions, but not any earnings or unmatched employee contributions, or does the second paragraph totally trump the first, and if the second paragraph is true none of the distributions can be deducted? Or does none of this matter since the taxpayer is under retirement age? | |
| 15 May 2008 | |
| Don't believe that your client qualifies for the deduction since he is under 59 1/2. | |
| 15 May 2008 | |
| One of the things I want to know, but the instructions only give an age for an IRA distribution or the 'normal retirement age' for a pension plan. No age restriction is mentioned for a 401(k), except that only the match seems to qualify. | |
| 15 May 2008 | |
| What does the auditor say, or is this an automated difference notice? | |
| 15 May 2008 | |
| I believe that the statute denies the deduction for any distribution made before the participant reaches the earliest retirement age specified in the plan. The earliest retirement age is 59½ for most 401(k) plans. See MCL § 206.30(8)(d)(ii). | |
| 15 May 2008 | |
| Its an automated notice. all they ask for is a copy of the 1040, copy of the 1099-R and copy of the 5329 if filed. I'm not sure what criteria are being used to flag these returns, but I think it is the code 1 on the 1099-R, because not all of them have penalties.
Thank you for the MI code section. However, 401(k) plans seem to be excluded (except for the match exception) because they don't have a precribed amount of contribution or retirement age. 59.5 is not an age when benefits vest, etc, and the IRA deduction specifically says age 59.5 whereas the 401(K)subtraction does not give an age, hence the reason for the question. Will call the number on the notice and see if I can get clarification, but if calling MI is anything like calling the IRS, god only knows what info I'll get or if its correct. | |
| 16 May 2008 | |
| Yes, distributions from 401(k) plans will qualify as retirement benefits. However, premature distributions do not qualify as retirement benefits -- even if received from a 401(k) plan.
You can confirm this interpretation of the statute by reading page 14 of the Michigan state instructions to Form MI-1040. | |
| 16 May 2008 | |
| It just seems to me that the second paragraph on page 14 conflicts with paragraph 2. Paragraph one states you cannot deduct from a plan that does not set retirement age or requirements for years of service, but paragraph 2 states amounts received before the recipient could retire under plan provisions. If you don't have a retirement age per paragraph one, how can you have amounts received before retirement age per plan provisions?
Also, only the er match or ee contributions attributed to an er match qualify. I'm just confused as to why the IRA definition gives a specific age, whereas the 401(k)for matches does not. | |
| 16 May 2008 | |
| Good point. Many 401(k) plans do not contain a normal retirement age. I do not believe that such plans satisfy the requirements of MCL § 206.30(1)(f)(iv) [payments made for life to senior citizens]. | |
| 17 May 2008 | |
| You have convinced me that your client is entitled to the deduction.
MCL § 206.30(8)(a)(iv) and MCL § 206.30(8)(i)(B), when read together, tend to suggest that most distributions of elective deferrals from 401(k) plans will not qualify for the deduction (because of the absence of a specified normal retirement age). However, those two statutory provisions also suggest that a distribution of a required elective deferral or a distribution of an employer contribution will qualify for the deduction. The short answer to your question is that the above-referenced statutes seem to imply that your client is eligible for the deduction if he can prove that the distributions were from employer contributions or required elective deferrals. | |
| 17 May 2008 | |
| I've got him looking for that proof now; the kicker in all this is that he discarded his statements when he cashed out the plan. Hoping to get new copies. I had him send in the requested docs to MI to get more time; I figure they will come back disallowing the deduction, and if we can prove the match (he said he had a good one, lucky dog), then I'll dispute the tax. I figure with the DIY returns I've got to deal with, we'll see a lot of these notices and I'd better be prepared. Our other office has at least two of them... | |
