Which is NOT true regarding a resident's IRA distribution in California?

Which is NOT true regarding a resident's IRA distribution in California?

• A. A distribution is fully taxable if contributions were fully deductible
• B. Nondeductible contributions are not taxed when distributed
• C. Part of each distribution is taxable if made after 1986
• D. The taxpayer's basis is the total of all contributions

Answer: (D)

The statement about the taxpayer's basis being the total of all contributions is not true. In California, the basis in an IRA includes only the contributions made that were not deducted when calculating the taxpayer's taxable income. This means that while the total of all contributions may seem like it should be the basis, any contributions that were fully deductible do not factor into the basis since they have effectively been taxed already upon distribution. When determining the taxable amount of an IRA distribution, it's essential to recognize that nondeductible contributions are not taxed upon distribution, reflecting the principle that one should not be taxed on their own money. Conversely, the taxable portion of a distribution after 1986 involves calculated considerations regarding both deductible and nondeductible contributions. Therefore, the correct understanding of what constitutes a taxpayer's basis in an IRA directly contradicts the assertion that it simply equates to the sum of contributions made.

The statement about the taxpayer's basis being the total of all contributions is not true. In California, the basis in an IRA includes only the contributions made that were not deducted when calculating the taxpayer's taxable income. This means that while the total of all contributions may seem like it should be the basis, any contributions that were fully deductible do not factor into the basis since they have effectively been taxed already upon distribution.

When determining the taxable amount of an IRA distribution, it's essential to recognize that nondeductible contributions are not taxed upon distribution, reflecting the principle that one should not be taxed on their own money. Conversely, the taxable portion of a distribution after 1986 involves calculated considerations regarding both deductible and nondeductible contributions.

Therefore, the correct understanding of what constitutes a taxpayer's basis in an IRA directly contradicts the assertion that it simply equates to the sum of contributions made.