Will my Roth IRA conversion hurt my Senior Freeze benefit?

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Q. In addition to taking my Required Minimum Distribution (RMD), I took money from my IRA and converted it to a Roth. For the purpose of calculating my income for the Senior Freeze application, do I have to add the money I converted as income? I already know that the RMD is added as income.
— Hopeful

A. Let’s start with a little background.

In New Jersey, seniors over the age of 65 and certain people receiving federal Social Security disability benefit payments, if they meet income eligibility limits, can qualify to have their property taxes frozen at the amount assessed for the year they first meet those requirements, said Laurie Wolfe, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.

There are other requirements concerning the length of time you lived in and owned your home in New Jersey, she said

The first year you meet the requirements is called the “base year.”

“Then, if you continue to meet the requirements each following year, you will get a refund for any amount of property taxes you pay in excess of the taxes assessed in that base year,” Wolfe said.

She offered this example: If you meet the eligibility requirements for 2017 and 2018, your property taxes will stay at 2017 levels for each year going forward that you qualify and meet the income limits. The savings comes in the form of a refund.

In 2019, the income cutoff for eligibility for the Senior Freeze program was $91,505, regardless of your marital/civil union status, she said. This number is indexed for inflation each year.

If you fail to meet the requirements in any year after the base year you must start all over, Wolfe said.

That makes your question a very good one because the amount of your income is crucial to being eligible, and as you know, the conversion of an IRA to a Roth IRA creates taxable income, she said.

“If you go over the cutoff by $1, you are not eligible for the program,” she said. “The punch line is that you do not have to include the amount of any traditional to Roth conversion you make during the year in question. The Senior Freeze application specifically includes this as an adjustment (reduction) to the amount of total income considered.”

You should begin with the total taxable amount of pension and annuity payments, including IRA withdrawals, that are reported to you on Forms 1099-R, Wolfe said. The federally taxable amount is the amount reported to you in Box 2a of this form.

“Sometimes there is a difference in the amount that is taxed for federal purposes and the amount that is taxed by New Jersey,” she said. “For example, U.S. military pensions or survivor’s benefit payments are not taxable by New Jersey.”

You must follow the instructions for NJ-1040, line 20a, to determine the amount that is taxable for New Jersey, whether or not you are required to file a state tax return, Wolfe said.

From there, the instructions for the Senior Freeze form direct you to make adjustments to calculate the amount of income considered for purposes of this property tax benefit, she said.

Directly from the form instructions is the following:

“Adjustments. For purposes of this program, you must make adjustments as follows:

1. Add any amounts received as U.S. military pension or survivor’s benefit payments.

2. Add any amounts received as a total and permanent disability pension before you reached age 65. Note: Once you reach age 65, you must include any payments you receive from a disability pension.

3. Add the portion of any distribution from a Roth IRA you received that you would have reported if it were a traditional IRA. (See Appendix A.) Do not include income from a direct rollover to another financial instrument, a tax-free exchange of a policy or contract between two insurance companies, or a conversion from an existing traditional IRA to a Roth IRA.”

The answer to your question is included in the very last bit of guidance for line b, Pension and Retirement benefits, in the form instructions, Wolfe said.

“In many cases a conversion from a traditional IRA to a Roth IRA makes sense,” she said. “But there are other benefits that can also be affected by including additional amounts in your gross income. I would advise you to seek the advice of a tax professional.”

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This story was originally published on Feb. 3, 2021.

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