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How to calculate IRA distribution tax-exempt portion for state
Old 03-17-2023, 11:10 PM   #1
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How to calculate IRA distribution tax-exempt portion for state

In my state (Oregon), it appears that for income tax purposes one can subtract the part of IRA distributions that corresponds to tax-exempt U.S. government interest received. The question is, how to do it? I did find info on Vanguard (my IRA custodian) listing the percentage of each fundís dividends derived from U.S. government obligations in 2022. But that's just one year. My IRA was opened 20 years ago and has held a mix of funds over the years. TurboTax says to "figure the total of all U.S. government interest received by your IRA from the beginning through December 31, 2022." How the heck would one ever be able to do that? Vanguard was no help. I figure some of the smart folks here can offer some guidance. Thanks in advance for any tips.
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Old 03-18-2023, 12:28 AM   #2
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Vanguard won't provide tax advice.

I'd start with page 88 of the Oregon instructions related to that subtraction at https://www.oregon.gov/dor/forms/For...1-431_2022.pdf and adventure forward from there.

I think what you'd need to do is start at the beginning of your IRA history and calculate for each year the amount of US government interest earned each year. You'd do that by figuring out how much income each fund earned each year in your IRA and multiply it by the percentage of US government interest that fund earned in that year.

That's a major financial-archaeology project. I don't know if Vanguard maintains 20 years of account history, and your IRA may not have even been at Vanguard that whole time. And then they publish a separate document with the US government interest by fund each year, so you'd have to get a copy of that. Can Vanguard provide you with the last 20 years of that document? Maybe. (I have several years' worth of that document because I use it for my own tax purposes and would be happy to send it to you, but you'd be relying on SGOTI for tax preparation data, which is generally not recommended.)

And then you have to do the math for every fund, every year.

And then you have to account for any distributions you've made from the IRA. Hopefully this is your first year. If not, you'd have to account for previous year distributions by following the example table in the OR-17 document linked above. If you did have prior year distributions and this is the first year you're aware of this provision, you could consider amending those prior years if it's within the timeframe allowed by Oregon to amend.

I would think that Oregon would let you do a partial job. In other words, even if you're entitled to go back to the very beginning of your IRA, if you only go back the last five years, they should let you take the subtraction for that amount. Kind of depends on how many of the appropriate records you can find, how willing you are to do the work, and how confident you are that you're doing it all properly.
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Old 03-18-2023, 03:14 AM   #3
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It seems to me that Oregon is making it so onerous that people just give up and decide that it isn't worth the effort if you hve done any trading over the years, but it could be significant, especially if you have held Total Bond or other fixed income funds that are largely US Treasuries.

I'd go backwards as far as you can year-by-year and then declare victory.
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Old 03-18-2023, 07:46 AM   #4
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Here are the last 8 years' data. I'll look in my paper files to see if I have anything older. I think Bogleheads may also have some of this information.

https://www.vanguard.com/pdf/USGOIN_2023.pdf
https://personal.vanguard.com/pdf/USGOIN_01_2022.pdf
https://personal.vanguard.com/pdf/USGO_012021.pdf
https://personal.vanguard.com/pdf/USGO_012020.pdf
https://personal.vanguard.com/pdf/USGO_012019.pdf
https://personal.vanguard.com/pdf/USGO_022018.pdf
https://personal.vanguard.com/pdf/USGO_012017.pdf
https://personal.vanguard.com/pdf/USGO_012016.pdf
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Old 03-18-2023, 10:47 AM   #5
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Quote:
Originally Posted by SecondCor521 View Post
Vanguard won't provide tax advice.
....
I think what you'd need to do is start at the beginning of your IRA history and calculate for each year the amount of US government interest earned each year.

That's a major financial-archaeology project. I don't know if Vanguard maintains 20 years of account history

And then you have to account for any distributions you've made from the IRA. Hopefully this is your first year.

I would think that Oregon would let you do a partial job.
Thanks @SecondCor521, you've echoed my thoughts. And TurboTax, which says: Follow these steps to calculate the percentage of your distribution that qualifies:

1. Add the amount of your 2022 distributions to the total account balance as of December 31, 2022.

2. Figure the total of all U.S. government interest received by your IRA or retirement account from the beginning through December 31, 2022.

3. Subtract the total exempt part of your distributions from all prior years through 2021. If the result is negative, use zero for this step.

4. Divide the result from Step 3 by the result from Step 1. This is your Oregon exempt ratio.

5. Multiply the result from Step 4 (Oregon exempt ratio) by the amount of your 2022 distributions.


When I contacted Vanguard it was to ask them if they could provide this history, as they've held my IRA for 20 years. Given how sophisticated technology has become in so many ways (AI chatbots writing term papers!), I would think a financial institution like Vanguard could do the math for me. Then again, I suppose there' nothing in it for them.

This is the first year I've taken a distribution (an IRA rollover), thus the first time this has come up. The distribution was large enough that I figure the state-level subtraction could save me a couple hundred bucks.

As best I can tell, it'd be impossible to calculate exactly since the full data just aren't available. Guess I'll swag it, and assume that my AA has been pretty consistent over the years (35% fixed income funds) as have the % of income in those funds from government obligations (using Vanguard's 2022 data as a proxy).

Going forward, I may start keeping track of this each year. In hindsight, that would really be the only way one could have the data, if you'd kept track each year since the beginning. I do have almost 30 years of Quicken data for my checking accounts, but sometimes didn't keep up with portfolio tracking due to technical challenges with importing the data, etc.
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Old 03-18-2023, 10:58 AM   #6
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Originally Posted by pb4uski View Post
It seems to me that Oregon is making it so onerous that people just give up and decide that it isn't worth the effort if you hve done any trading over the years, but it could be significant, especially if you have held Total Bond or other fixed income funds that are largely US Treasuries.

I'd go backwards as far as you can year-by-year and then declare victory.
Yeah, this is what I'm thinking. I doubt the state makes it onerous on purpose, but the process inherently is. For most individuals the tax savings are no doubt minimal and not worth the effort. But at the aggregate level it means the state is getting a bunch of money it's really not entitled to, which bugs me.
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Old 03-18-2023, 10:59 AM   #7
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Originally Posted by pdxgal View Post
Thanks @SecondCor521, you've echoed my thoughts. And TurboTax, which says: Follow these steps to calculate the percentage of your distribution that qualifies:

1. Add the amount of your 2022 distributions to the total account balance as of December 31, 2022.

2. Figure the total of all U.S. government interest received by your IRA or retirement account from the beginning through December 31, 2022.

3. Subtract the total exempt part of your distributions from all prior years through 2021. If the result is negative, use zero for this step.

4. Divide the result from Step 3 by the result from Step 1. This is your Oregon exempt ratio.

5. Multiply the result from Step 4 (Oregon exempt ratio) by the amount of your 2022 distributions.


When I contacted Vanguard it was to ask them if they could provide this history, as they've held my IRA for 20 years. Given how sophisticated technology has become in so many ways (AI chatbots writing term papers!), I would think a financial institution like Vanguard could do the math for me. Then again, I suppose there' nothing in it for them.

This is the first year I've taken a distribution (an IRA rollover), thus the first time this has come up. The distribution was large enough that I figure the state-level subtraction could save me a couple hundred bucks.

As best I can tell, it'd be impossible to calculate exactly since the full data just aren't available. Guess I'll swag it, and assume that my AA has been pretty consistent over the years (35% fixed income funds) as have the % of income in those funds from government obligations (using Vanguard's 2022 data as a proxy).

Going forward, I may start keeping track of this each year. In hindsight, that would really be the only way one could have the data, if you'd kept track each year since the beginning. I do have almost 30 years of Quicken data for my checking accounts, but sometimes didn't keep up with portfolio tracking due to technical challenges with importing the data, etc.
Yeah, those TT instructions appear to mirror the official Oregon tax prep guide I linked to in my previous reply. Which is what I would expect.

For Vanguard, it's worse than nothing. First, if they gave tax advice, that would take their time and effort away from providing investment products and services. Second, their tax advice might be wrong, and they'd be liable if so.

What Vanguard might be able and willing to do is provide old history. I'm not sure how far back they retain stuff though. When I called them about my IRA contribution history, they were able to go back to the beginning of my account, which at the time was over a decade. If you think about it, the struggles you have with managing your one IRA history in Quicken is millions of times easier than Vanguard tracking all of their customer history. They have done technology upgrades over the years too. ;-)

The SWAG approach is probably defensible and understandable. (ETA: I do agree with Sunset's post below that a more precise SWAG is much better.)

I didn't look at the math too closely, but it does look like your distribution this year somehow will be an input to your calculations the next time you use this subtraction. I'd at least try to follow the example calculation in the Oregon OR-17 pub for the second year/column (starting from your SWAG this year).
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Old 03-18-2023, 11:00 AM   #8
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Originally Posted by pdxgal View Post
......
......

As best I can tell, it'd be impossible to calculate exactly since the full data just aren't available. Guess I'll swag it, and assume that my AA has been pretty consistent over the years (35% fixed income funds) as have the % of income in those funds from government obligations (using Vanguard's 2022 data as a proxy).

Going forward, I may start keeping track of this each year. In hindsight, that would really be the only way one could have the data, if you'd kept track each year since the beginning. I do have almost 30 years of Quicken data for my checking accounts, but sometimes didn't keep up with portfolio tracking due to technical challenges with importing the data, etc.
Using 1 year as the percentage to guess for 20 years will be a hard argument to win IRS agreement.
I would think the more years you have and then use the avg of those years will be more likely to succeed. Just having the percent each year would be good.
Like how the IRS does foreign currency conversion, a person can take the actual conversion values each time , or just use the yearly avg as long as the payments were spread over the year.

Yes, obviously for your State folks could be motivated to track it going forward.
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Old 03-18-2023, 11:14 AM   #9
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Thanks Gumby!
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Old 03-18-2023, 11:27 AM   #10
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What Vanguard might be able and willing to do is provide old history. I'm not sure how far back they retain stuff though. When I called them about my IRA contribution history, they were able to go back to the beginning of my account, which at the time was over a decade.
Yeah, I'd assumed they could provide some history. When I called them though, they said it wasn't possible. In retrospect I think my phrasing of the question confused them. I asked about getting history in the context of being able to deduct part of my distribution for taxes, and the rep said that IRA distributions are not deductible, end of story.

Think I'll call them back and just ask for my account history, as far back as they have it.
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