Can a nonresident of New York deduct contributions made to a spousal IRA when figuring out New York source income?

Plain-English summary

Steven J. Eller asked the Department whether a nonresident couple could deduct contributions made to a spousal IRA when figuring their New York source income. The husband and wife are full-year nonresidents of New York who file joint federal and state returns. The husband works in New York State; the wife does not work at all. On their federal return, they claim a deduction under IRC § 219 for contributions the husband made to his own IRA and to a spousal IRA on his non-working wife's behalf, both of which reduce their federal adjusted gross income.

Tax Law § 631(a) sets New York source income as the sum of the items of income, gain, loss, and deduction that enter into federal adjusted gross income and are "derived from or connected with New York sources," plus certain New York modifications. A federal deduction only affects the New York source-income numerator if it's connected to New York sources - meaning it's tied to property owned in New York or to a business, trade, profession, or occupation carried on in New York.

The Department reasoned that because the spousal IRA deduction exists only because the husband has compensation (his wife has none), and that compensation arises from his New York job, the deduction is derived from or connected with New York sources. So it belongs in the numerator of the New York source fraction used to compute the nonresident's tax under Tax Law § 601(e). But the deduction isn't allocated to New York in full - it must be apportioned. The Department held that the spousal IRA deduction included in the numerator is limited to the percentage of the husband's total compensation that is attributable to services performed within New York State, applied to the federally allowable deduction amount.

In short, the spousal IRA deduction is deductible in computing New York source income, but only in proportion to how much of the husband's compensation for personal services was earned in New York versus everywhere else.

What this means for you

Nonresidents whose only working spouse claims a spousal IRA deduction

If you're a nonresident of New York, your spouse doesn't work, and you both file jointly and claim a federal deduction for a spousal IRA contribution funded by your compensation, that deduction can reduce your New York source income - but only to the extent your compensation is itself New York-source. If you work partly in New York and partly elsewhere, you'll need to apportion the deduction using the same percentage that applies to your wages.

Accountants and tax professionals

When preparing a nonresident return with a federal spousal IRA deduction, don't drop the full federal deduction amount into the New York source-income numerator. Multiply the allowable federal deduction by the ratio of the working spouse's New York-source compensation to total compensation, consistent with how the underlying wages are apportioned under Tax Law § 631(b)(1).

Common questions

Q: Can a nonresident deduct spousal IRA contributions at all when computing New York source income?
A: Yes, if the deduction is connected to compensation that is itself derived from or connected with New York sources - for example, wages the working spouse earned for a New York job.

Q: Is the full federal spousal IRA deduction allowed against New York source income?
A: No. Only the portion connected with New York-source compensation is includible in the numerator of the New York source fraction; the rest is excluded.

Q: How is the New York-source portion of the deduction calculated?
A: By multiplying the federally allowable spousal IRA deduction by a percentage - the compensation the working spouse earned for services performed in New York State divided by that spouse's total compensation from services performed both within and without New York State.

Q: Does it matter that the wife herself has no compensation?
A: No. Because the couple files jointly, IRC § 219 allows the deduction based on the husband's compensation even though it funds a spousal IRA for the non-working wife; the deduction still traces back to the husband's New York employment for apportionment purposes.

Citations and references

• Tax Law § 601(e) - imposes personal income tax on a nonresident's New York source income, computed via the New York source fraction
• Tax Law § 631(a) - defines New York source income of a nonresident as income, gain, loss, and deduction connected with New York sources
• Tax Law § 631(b)(1) - items derived from or connected with New York sources include those attributable to a business, trade, profession, or occupation carried on in New York
• IRC § 219 - allows a deduction for contributions to an IRA, including a spousal IRA where the couple files a joint federal return
• IRC § 62(a)(7) - includes the IRC § 219 retirement savings deduction among the adjustments used to compute federal adjusted gross income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a03_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(7)I
Income Tax
December 29, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I030825B

On August 25, 2003, a Petition for Advisory Opinion was received from Steven J. Eller, c/o
Buchbinder Tunick & Co., LLP, One Penn Plaza, Suite 5335, New York, New York 10119.
The issue raised by Petitioner, Steven J. Eller, is whether a nonresident of New York can
deduct contributions made to a spousal Individual Retirement Account (IRA) in determining
New York source income under section 631 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
A husband and wife are full year nonresidents of New York State and file federal and state
personal income tax returns with a filing status married filing jointly. The husband is employed
within New York State. The wife is not employed. In computing federal adjusted gross income,
the husband and wife are allowed a deduction, pursuant to section 219 of the Internal Revenue Code
(IRC), for contributions the husband made to an IRA. They are also allowed to deduct, pursuant to
IRC section 219, contributions made to a spousal IRA.
Applicable law and regulations
IRC section 62(a) contains adjustments to gross income in computing federal adjusted gross
income, and provides, in part:
General Rule. For purposes of this subtitle, the term “adjusted gross income” means,
in the case of an individual, gross income minus the following deductions:
*

*

*

(7) Retirement savings. The deduction allowed by section 219 (relating to deduction
of certain retirement savings).
IRC section 219, relating to retirement savings, provides, in part:
(a) Allowance of Deduction. In the case of an individual, there shall be allowed as
a deduction an amount equal to the qualified retirement contributions of the individual for
the taxable year.
(b) Maximum Amount of Deduction.

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(1) In general. The amount allowable as a deduction under subsection (a) to any
individual for any taxable year shall not exceed the lesser of
(A) the deductible amount, or
(B) an amount equal to the compensation includible in the individual’s gross income
for such taxable year.
*

*

*

(5) Deductible amount. For purposes of paragraph (1)(A)
(A) In general. The deductible amount shall be determined in accordance with the
following table:
*

*

*

(c) Special rules for certain married individuals.
(1) In general. In the case of an individual to whom this paragraph applies for the
taxable year, the limitation of paragraph (1) of subsection (b) shall be equal to the lesser of
(A) the dollar amount in effect under subsection (b)(1)(A) for the taxable year, or
(B) the sum of
(i) the compensation includible in such individual’s gross income for the taxable
year, plus
(ii) the compensation includible in the gross income of such individual’s spouse for
the taxable year reduced by
(I) the amount allowed as a deduction under subsection (a) to such spouse for such
taxable year,
(II) the amount of any designated nondeductible contribution (as defined in section
408(o)) on behalf of such spouse for such taxable year, and
(III) the amount of any contribution on behalf of such spouse to a Roth IRA under
section 408A for such taxable year.

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December 29, 2003

(2) Individuals to whom paragraph (1) applies. Paragraph (1) shall apply to any
individual if
(A) such individual files a joint return for the taxable year, and
(B) the amount of compensation (if any) includible in such individual’s gross income
for the taxable year is less than the compensation includible in the gross income of such
individual’s spouse for the taxable year.
Section 601(e) of the Tax Law imposes a personal income tax on a nonresident of New York
State, and provides, in part:
Nonresidents and part-year residents. (1) General. There is hereby imposed for each
taxable year on the taxable income which is derived from sources in this state of every
nonresident and part-year resident individual ... a tax which shall be equal to the tax base
multiplied by the New York source fraction.
(2) Tax base. The tax base is the tax computed under subsections (a) through (d) of
this section, as the case may be, reduced by the credits permitted under subsections (b), (c),
(d) and (m) of section six hundred six, as if such nonresident or part-year resident individual
... were a resident subject to the provisions of part II of this article.
(3) New York source fraction. The New York source fraction is a fraction the
numerator of which is such individual's ... New York source income determined in
accordance with part III of this article and the denominator of which is such individual's
New York adjusted gross income determined in accordance with part II of this article....
Section 631(a) of theTax Law determines New York source income of a nonresident
individual, and provides, in part:
General. The New York source income of a nonresident individual shall be the sum
of the following:
(1) The net amount of items of income, gain, loss and deduction entering into
his federal adjusted gross income, as defined in the laws of the United States for the
taxable year, derived from or connected with New York sources ... and
(2) The portion of the modifications described in subsections (b) and (c) of
section six hundred twelve which relate to income derived from New York sources....
Section 631(b)(1) of the Tax Law provides, in part:

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Items of income, gain, loss and deduction derived from or connected with New York
sources shall be those items attributable to:
(A) the ownership of any interest in real or tangible personal property in this state;
or
(B) a business, trade, profession or occupation carried on in this state; ...
Opinion
Section 601(e) of the Tax Law imposes a personal income tax on the taxable income which
is derived from New York sources of a nonresident individual. The tax is equal to the tax computed
as if the individual were a New York State resident for the entire year, reduced by certain credits,
and then multiplied by the income percentage (i.e., New York source fraction). The numerator of
the fraction used to compute the income percentage is the individual’s New York source income.
The denominator of the fraction used to compute the income percentage is the nonresident’s New
York adjusted gross income from all sources for the entire year.
Section 631(a) of the Tax Law provides that the New York source income of a nonresident
is the sum of the items of income, gain, loss and deduction entering into federal adjusted gross
income derived from or connected with New York sources and any New York addition and
subtraction modifications under section 612(b) and (c) of the Tax Law that relate to income derived
from New York sources.
Therefore, for a federal deduction from gross income to be deductible in determining
New York source income, it must be derived from or connected with New York sources. Income
and deductions included in the computation of federal adjusted gross income are derived from or
connected with New York sources if they are attributable to the ownership of real or tangible
personal property in New York State or attributable to a business, trade, profession, or occupation
carried on in New York State.
With certain limitations and restrictions, an individual can make contributions to an IRA,
pursuant to sections 219 and 408 of the IRC, if such individual received compensation during the
year. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts
received for personal services. Section 219 of the IRC allows an individual to deduct from federal
gross income amounts paid for the taxable year by an individual on behalf of such individual to an
IRA. In addition, where an individual and the individual’s spouse file a joint federal income tax
return for the taxable year, an individual is allowed a deduction from federal gross income for
amounts paid for the taxable year by an individual or on behalf of such individual, for the benefit
of the individual’s spouse to an IRA.

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In this case, the husband is employed within New York State and the husband and wife file
a joint federal income tax return and are allowed a federal deduction for contributions made to a
spousal IRA as a result of the husband’s compensation includible in their gross income for the
taxable year. Such compensation is derived from or connected with the husband’s New York
employment. Accordingly, the federal deduction for contributions made to the spousal IRA under
section 219 of the IRC is derived from or connected with New York sources. Therefore, in
determining New York State source income pursuant to section 631 of the Tax Law, the numerator
of the New York source fraction includes a deduction for contributions made to a spousal IRA. The
amount of the deduction for contributions made to a spousal IRA that is included in the numerator
of the fraction is limited to the amount connected with compensation arising from sources within
New York State. To determine the amount connected with compensation arising from sources
within New York State, the spousal IRA deduction allowable for federal purposes must be
multiplied by a percentage. The percentage is determined by dividing the compensation attributable
to the husband’s employment for personal services performed within New York State by the total
compensation attributable to the husband’s employment for personal services performed both within
and without New York State.

DATED: December 29, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.