Q. How does one calculate the state tax on Required Minimum Distributions from an IRA if the IRA doubles in value?
A. It sounds like your IRA has done well with its investments.
Here’s how the Required Minimum Distributions (RMDs) would work.
The state tax on your RMD each year is taxed based on your ordinary tax rate for all of your income as calculated on your state tax return, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.
Depending on the state you are filing in, there may or may not be a retirement income exclusion, Gallo said.
If you are in New Jersey and your income, including your RMD, is below $100,000, you may qualify for a $40,000 exclusion for those married filing jointly in 2017. That amount goes up $20,000 a year until it reaches $100,000 in 2020. Those married filing separately and singles have the benefit too, but at smaller maximums.
“You will owe no state tax on your RMD if they fall within these parameters and your total income is below the income thresholds,” Gallo said.
Gallo said your annual RMD is calculated each year based on the IRA value on Dec. 31 of the prior year.
“If your IRA doubled the RMD amount will obviously be higher,” he said. “The higher your income, the higher your potential state tax liability.”
If you have state tax withheld from your RMD amount, you should not have any concerns with calculating the tax due because it will be done automatically by the firm managing your IRA, Gallo said.
“If you pay estimated taxes rather than having the tax withheld, you will not be penalized if you owe state tax as long as you made estimated payments equivalent to the tax liability from the previous year, regardless of how much you owe,” he said.
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