19 Dec How much will I owe in state tax on this inherited IRA?

Q. I currently inherited my mother’s IRA. What percentage will I be taxed for the state of New Jersey, if any? I received my check already with federal taxes taken out.
— Beneficiary

A. We’re sorry to hear about your mom.

Based on the limited facts you provided, there are several issues to address.

The first question is how your mother’s IRA was created, said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.

“If it was created from yearly IRA contributions, which were not deductible under New Jersey law, then only the earnings portion of the IRA distribution is potentially subject to New Jersey tax,” Becourtney said.

Presumably, the IRA in question was not from a Roth IRA based on federal income tax having been withheld, he said.

But if, on the other hand, the IRA resulted from a rollover of a qualified retirement plan distribution such as a 401(k) plan, then the entire IRA distribution is potentially subject to tax, Becourtney said.

The “potentially” in that answer comes because you may be able to avoid the tax altogether depending on whether you qualify for the New Jersey pension exclusion, Becourtney said.

To quality, you need to be 62 or older as of Dec. 31, 2024 with total gross income reportable for state purposes of $150,000 or less.

The pension exclusion differs based on filing status, Becourtney said.

“Assuming you are single and meet the age and income requirements, you could exclude up to $75,000 if your gross income does not exceed $100,000, or 50% if your gross income is $100,001 to $125,000, or 18.75% if your gross income is $125,001 to $150,000,” he said.

If any portion of the inherited IRA is subject to New Jersey tax, the effective tax rate would be based on your overall taxable income, he said.

“New Jersey personal income tax rates range from a low of 1.4% on the first $20,000 of taxable income to a top rate of 10.75% on taxable income of $1 million and above,” Becourtney said.

We also note that you said you already received the check, so we want to make sure you know you don’t have to take all the money at once. Check with your tax advisor of financial planner to discuss your options.

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This story was originally published in December 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.