19 Aug How do I calculate the cost basis for an inherited IRA?

Q. I have an inherited IRA from my grandmother. I receive small Required Minimum Distributions (RMDs) annually since she passed in 2008. What is the cost basis of an inherited IRA for New Jersey? I had another non-deductible IRA of my own and did some Roth conversions so I want to make sure the two transactions are appropriately taxed separately.
— Grandaughter

A. Handling cost basis for retirement accounts can be complex.

Especially in New Jersey.

Calculating the taxable portion of IRA distributions for New Jersey gross income tax purposes is no easy task, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

He said you can learn more with the state’s Division of Taxation’s publication called “Retirement Income: Understanding Income Tax.”

Toward the very end of the publication is a discussion pertaining to survivors and beneficiaries of an IRA, Becourtney said.

The publication states that amounts received in the form of periodic payments are taxable “if they exceed the decedent’s previously taxed contributions to the plan.”

“You would need to calculate the `basis’ in your grandmother’s IRA as you would only be subject to tax on the investment growth that occurred,” Becourtney said. “The publication contains an IRA worksheet for calculating the taxable portion of IRA distributions, which can be completed separately for each IRA from which a withdrawal was received or completed in aggregate.”

He said you would want to complete the worksheet separately for each IRA being that you have Roth IRAs, which generally result in nontaxable distributions for New Jersey tax purposes.

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This story was originally published on Aug. 19, 2020.

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