08 Dec IRA contributions and the pension exclusion

Q. In regards to the $100,000 retirement income exclusion “cliff,” your recent piece noted “…the portion of any distribution allocable to the unrecovered contributions are nontaxable.” Is the same portion excluded from New Jersey tax because it’s not New Jersey income?
— Figuring it out

A. Deciding whether you will fall off that “cliff” can be tough to figure.

Here’s how it works.

If total gross income exceeds $100,000, the taxpayer is ineligible to claim any retirement income exclusion, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

For 2017, joint filers can exclude as much as $40,000, while it’s $30,000 for single and head of household filers and $20,000 for married separate filers.

“Before one gets to determining whether they can claim any retirement income exclusion, they must calculate how much of their retirement distribution income is taxable,” Becourtney said. “Any portion of an IRA distribution that is nontaxable — allocated to unrecovered contributions — is not reportable and therefore not part of gross income.”

Assuming gross income inclusive of taxable retirement distribution income does not exceed $100,000, the taxpayer would then apply the retirement income exclusion against their taxable retirement distribution income, Becourtney said.

So, he said, any non-taxable IRA distribution will not inflate gross income and result in losing out on the retirement income exclusion, Becourtney said.

Email your questions to .

This post was first published in December 2017.