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Your pickup contribution is comprised of income upon which Federal income tax was deferred, but the State tax was paid every year. This results in a timing difference. Since you have already paid state taxes on the pickup amount, you have to subtract it from your pension received, otherwise you will pay state tax on it twice.
To avoid this duplication, you are to report the amount in Box 17 on Line r of the Form 502SU. This allows you to deduct the amounts that you have already paid tax on. You are allowed to subtract the smaller of the pickup amount in Box 17, or the taxable pension amount in Box 2 of the Form 1099-R. You will deduct this amount each year until the Pickup amount is totally used. In that year, "EP USED" will appear in Box 17.
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