Are state taxes due on IRA distributions?

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Q. I’ll be getting a $30,000 Required Minimum Distribution (RMD) from my deductible IRA this year. I know I’ll have to pay federal income taxes, but do I have to pay New Jersey income taxes on that distribution? My other income is a taxable pension of $35,000 and Social Security of about $20,000, and my wife has income of $45,000.
— Retired

A. The simple answer is yes, but calculating the taxable portion of the RMD is more complicated.

Bulletin GIT-2, IRA Withdrawals, which is available from the New Jersey Division of Taxation website, provides a New Jersey IRA worksheet to calculate the taxable portion of the IRA distribution, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

“As New Jersey does not allow a deduction for any IRA contribution, `unrecovered contributions’ — basis — are created,” Becourtney said. “When future distributions occur, the portion of any distribution allocable to the unrecovered contributions are nontaxable, leaving only the investment growth portion of the distribution subject to tax.”

You said this would be an RMD, so we’re assuming your age exceeds 70 1/2 because taxpayers must begin taking RMDs from IRAs by April 1 following the year they attain age 70 1/2.

That means you may be eligible for the New Jersey retirement income exclusion for which one spouse must have reached age 62.

For joint filers, this exclusion increased from $20,000 to $40,000 for 2017 as a result of legislation enacted last fall in conjunction with the increase in the gas tax, Becourtney said. Gross income must not exceed $100,000 in order to claim the retirement income exclusion.

Let’s look at the numbers you provided. You said you have taxable pension income of $35,000 plus income generated by your wife of $45,000 for a total of $80,000. The Social Security benefits are fully nontaxable for New Jersey purposes, Becourtney said.

“So if less than $20,000 of the $30,000 RMD is taxable, then total gross income will not exceed $100,000 and the taxpayer in this instance will be able to claim a retirement income exclusion to offset the $35,000 taxable pension plus $5,000 of taxable IRA distributions,” Becourtney said. “If the taxable IRA distribution income is below $5,000 then the retirement income exclusion would be lower than the $40,000 maximum amount.”

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