Q. When I receive IRS Form 1099-R reporting my IRA distributions, I report the income in full on my federal form 1040. How does New Jersey tax this income being that I never got to deduct my IRA contributions in past years for New Jersey purposes?
A. It certainly can be confusing when the IRS allows deductions for your federal tax return but the rules are different for your New Jersey return.
You are correct as far as New Jersey not allowing any deduction for IRA contributions under the gross personal income tax, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.
Here’s how it works.
If you receive distributions from a “traditional” IRA, your distributions are a combination of your contributions plus investment earnings and possibly rollovers into your IRA from a pension plan, Becourtney said.
“When a New Jersey resident receives distributions from their IRA, they must report the portion of the distribution that represents investment earnings including rollovers from pension plans based on a ratio that the taxable portion of the account bears to the total amount in the account,” he said.
The rules and a useful worksheet can be found in Bulletin GIT-2 from the New Jersey Division of Taxation website.
Becourtney said qualified distributions from a Roth IRA are excluded from New Jersey tax.
“A qualified distribution means any distribution made after the five-year period beginning with the first tax year in which a contribution was made to a Roth IRA and is made on or after attaining age 59 1/2,” he said.
There’s one bit of good news if you ever leave the state.
If a New Jersey resident has IRAs and subsequently becomes a resident of another state, New Jersey is prohibited from taxing any IRA distributions because federal law prohibits states from taxing the retirement plan distribution income of nonresidents, even if the retirement plan was established while the recipient was a resident, Becourtney said.
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