Don’t Get Taxed Twice on Your IRA in New Jersey

Don't Get Taxed Twice on Your IRA in New Jersey

July 2012

By Jeffrey T. Boyer, CFP?, Wealth Advisor

Jersey, since a state income tax deduction was not allowed on these monies.

The New Jersey Division of Taxation recommends that you keep any statements that show contributions made to your IRA and any worksheets from previous tax years. You may need to provide this information to avoid paying more tax than necessary.

Double Trouble

Some states, including New Jersey, do not align their tax code with the Internal Revenue Service when it comes to the tax treatment of IRA contributions and withdrawals. In making contributions to an IRA, often times taxpayers will receive a deduction on their federal tax return. However, no deduction is allowed on their New Jersey state tax return. In order to avoid the double taxation of IRA assets in New Jersey, individuals will need to make sure that distributions from their IRA accounts are not fully taxed at the New Jersey state level.

For example, if a taxpayer in New Jersey makes cumulative IRA contributions of $100,000, for which no state income tax deduction is allowed, the taxpayer will effectively carry a $100,000 basis amount that is not subject to state income taxes upon distribution.

Assuming this IRA account is valued at $400,000 today, and assuming the individual made $100,000 of contributions that were non-deductible for New Jersey income tax purposes, how would a withdrawal of $60,000 be treated for New Jersey tax purposes? The calculation to determine the non-taxable portion for New Jersey would look like this: Non- Taxable Calculation

The result of this example is that New Jersey will only tax $45,000 of the $60,000 IRA distribution, which represents the earnings portion of the withdrawal. The remaining $15,000 that represents contributions to the IRA is not taxed in New

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Non- Taxable Calculation

$100,000 X $60,000 = $15,000 $400,000

Conclusion

In addition to traditional IRA's, some of the most common types of accounts where this tax treatment could apply include KEOGH plans and 403(b) plans, resulting in NJ state tax savings when taking a distribution. However, it should be noted that amounts that you roll over to an IRA from an employer's 401(k) plan, likely do not count towards this "basis" for New Jersey income tax purposes. In any case, it is important to consult a tax professional before taking action on the information presented above.

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