Why does the government want to know my IRA value?

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Q. My wife and I are both seniors who are retired. Several years ago, our tax preparer wanted to know the total value of our combined IRAs for our New Jersey return. When I asked why, she said it was because if we moved to a state such as Florida where there is no state income tax, New Jersey would seek to claw back state income taxes on IRA money that was earned in New Jersey. Is that correct?
— Retired

A. It’s against federal law for any state to claw back taxes on money earned in that state if the taxpayer moves to a tax-free state.

But there are valid reasons why your tax preparer will want to know the total market value of your IRA accounts, specifically, they’re needed to make calculations for your Required Minimum Distributions (RMDs).

Let’s go back for a moment.

We frequently talk about basis when we are talking about income taxes.

Basis is the amount you have invested in something like a stock, a bond or your house. When you sell or withdraw something, you do not pay taxes on your basis, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said traditionally, IRA contributions had zero basis for federal income tax purposes. People would make tax deductible contributions to their IRA or they would roll over 401(k) or 403(b) accounts into their IRAs.

New Jersey has never allowed a tax deduction for IRA or self-employed pension accounts, Kiely said, so the amounts in these accounts usually had no federal basis but they did have basis for state income tax purposes.

So when you make your first IRA withdrawal, how do you deal with your tax basis for New Jersey purposes?

Kiely said New Jersey has two methods to deal with tax basis for IRAs.

New Jersey has a worksheet in the Instructions for the NJ-1040 tax return. The worksheet is “Worksheet C – IRA Withdrawals.” In order to complete the worksheet, you or your tax preparer needs to know the following information:

1. The value of all your IRAs at the end of the tax year in question

2. The amount that you withdrew from your IRA during the tax year in question

3. The total of all previous IRA distributions that were taxed

4. The total of your unrecovered contributions (your basis)

Kiely said every year, you must calculate the remaining percentage of your basis in the total of all your IRA accounts at the beginning of the tax year. You use this percentage to calculate the amount of the current year’s distribution that represents basis that can be excluded from taxation. Once you determine the current year’s basis, you subtract that amount from the “The total of your unrecovered contributions.”

“Each year the total of your IRAs changes as well as the amount of unrecovered contributions and the amount of your IRA distributions for the year,” he said. “I keep an Excel spreadsheet for each retired tax client who has New Jersey basis in their IRA so I can do the calculations from year to year.”

Email your questions to moc.p1558568065leHye1558568065noMJN1558568065@ksA1558568065.