Is the part of an IRA distribution attributable to interest on U.S. obligations exempt from Kansas income tax?

Plain-English summary

The taxpayer asked whether the portion of an IRA distribution that is attributable to interest from U.S. obligations is exempt from Kansas income tax. The Department ruled that it is not - the whole distribution is taxed the way it is federally.

Kansas conforms to the federal treatment. "Kansas follows the federal tax treatment of distributions from Individual Retirement Accounts (IRA), including Roth IRA's. If the distribution is included in federal taxable income, then the income is likewise included in Kansas taxable income."

You cannot break the distribution down by the source of income inside the IRA. "Kansas does not allow a taxable IRA distribution to be modified from Kansas taxable income based [on] the source of the income within the IRA." The Department explained the reasoning: for federal purposes the distributions are simply treated as income (or non-income) items, and "IRA distributions are income to the individual and do not retain the characteristics or status of the type of investment that the IRA funds had been invested in."

So the U.S.-obligation piece is not carved out. Even though interest on U.S. obligations is ordinarily not taxed by a state, once it is earned inside an IRA and later distributed, it loses that character. "Therefore, those amounts would also be included in Kansas taxable income without exclusion." The Department added that it was "not aware of any Kansas court cases on this matter."

Bottom line: an IRA or Roth distribution is taxed by Kansas to the same extent it is taxed federally, and the part attributable to interest on U.S. obligations is not exempt - the distribution does not keep the tax character of the investments held inside the account.

What this means for you

Individuals taking IRA or Roth distributions

Report the distribution for Kansas to the same extent it is included in your federal taxable income. You cannot reduce the Kansas amount by tracing part of the distribution to a normally tax-favored source, such as interest on U.S. Treasury obligations.

The U.S.-obligation exclusion doesn't survive the IRA

Interest on U.S. obligations held directly is generally not taxed by states, but interest earned inside an IRA is folded into the distribution as ordinary IRA income. The distribution does not retain the character of the underlying investments, so no exclusion applies.

Kansas follows the federal number

Because Kansas conforms to the federal treatment, if the distribution is in federal taxable income it is in Kansas taxable income; if it is not taxable federally, it is not taxable in Kansas.

Common questions

Q: Is the U.S.-obligation portion of an IRA distribution exempt from Kansas income tax?
A: No. The Department ruled that the amount is included in Kansas taxable income without exclusion, because an IRA distribution does not retain the character of the investments held inside the IRA.

Q: How does Kansas tax IRA and Roth distributions?
A: It follows the federal treatment. If the distribution is included in federal taxable income, it is included in Kansas taxable income.

Q: Can I subtract amounts based on what the IRA was invested in?
A: No. Kansas does not allow a taxable IRA distribution to be modified based on the source of income within the IRA.

Citations and references

• The Department based this ruling on Kansas's conformity to the federal income-tax treatment of IRA and Roth IRA distributions: amounts included in federal taxable income are included in Kansas taxable income, and a distribution cannot be modified based on the source of income within the IRA. It concluded that the portion attributable to interest on U.S. obligations is not exempt, because IRA distributions do not retain the character of the underlying investments, and noted it was aware of no Kansas court cases on the point. No specific K.S.A. section was cited in the ruling for the holding.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2000-048

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 26, 2000

XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Dear XXXXXXXX

This letter is in response to your letter dated August 17, 2000.

Kansas follows the federal tax treatment of distributions from Individual Retirement Accounts (IRA), including Roth IRA’s. If the distribution is included in federal taxable income, then the income is likewise included in Kansas taxable income. Kansas does not allow a taxable IRA distribution to be modified from Kansas taxable income based the source of the income within the IRA. The basis of this position is that for Federal purposes the distributions are treated as income or non-income items. You ask if the IRA proceeds that are attributable to interest from U.S. obligations would be exempt from Kansas income tax. IRA distributions are income to the individual and do not retain the characteristics or status of the type of investment that the IRA funds had been invested in. Therefore, those amounts would also be included in Kansas taxable income without exclusion.

I am not aware of any Kansas court cases on this matter.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Mark D. Ciardullo
Tax Specialist

Date Composed: 09/28/2000 Date Modified: 10/10/2001

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