Retirement Income, GIT-1&2

Retirement Income

Understanding Income Tax

New Jersey is one of the top cranberry producers in the nation.

Coronavirus-Related Distribution........................................................................................................................ 3 Reporting Distributions..........................................................................................................................................................................3 Keep Your Records...................................................................................................................................................................................3 Distribution Recontributed and Repaid Timely.............................................................................................................................3

Common Retirement Plans Discussed in this Guide .......................................................................................... 3 Calculating Taxable and Excludable Amounts: Pensions and Annuities ......................................................... 3

Noncontributory Plans ........................................................................................................................................................................... 4 Contributory Plans ................................................................................................................................................................................... 4 Three-Year Rule Method or the General Rule Method..............................................................................................................4 Three-Year Rule Method ...................................................................................................................................... 5 General Rule Method ............................................................................................................................................ 5 Contributions Prior to Residence ....................................................................................................................................................... 8 Lump Sum Distributions ........................................................................................................................................................................ 8 IRA Contributions.................................................................................................................................................. 8 Traditional IRA ........................................................................................................................................................................................... 8 Roth IRA ....................................................................................................................................................................................................... 8 Rollovers ...................................................................................................................................................................................................... 8 Contributions Prior to Residence ....................................................................................................................................................... 9 IRA Withdrawals.................................................................................................................................................... 9 Traditional IRA ........................................................................................................................................................................................... 9

GIT-1 & 2

May 2021 1

Retirement Income Understanding Income Tax

Roth IRA .................................................................................................................................................................................................... 10 Rollovers ................................................................................................................................................................................................... 10 Retirement Income Loan .................................................................................................................................... 11 Coverdell Education Savings Account (ESA) .................................................................................................... 11 Periodic Distributions ......................................................................................................................................... 11 Other Retirement Plans ...................................................................................................................................... 14 Section 401(k) Plans.............................................................................................................................................................................. 14 Section 457 Plans................................................................................................................................................................................... 14 Section 403(b) Plans ............................................................................................................................................................................. 15 Reporting Taxable and Excludable Retirement Income.................................................................................. 15 Pensions, Annuities, Traditional IRAs, 401(k), etc. ..................................................................................................................... 15 Roth IRAs .................................................................................................................................................................................................. 18 Income Exclusions ............................................................................................................................................... 18 Pension Exclusion .................................................................................................................................................................................. 18 Only One Spouse Qualifies for Exclusion ..................................................................................................................................... 20 Other Retirement Income Exclusion: Unclaimed Pension Exclusion and Special Exclusion........................ 21 Unclaimed Pension Exclusion ........................................................................................................................................................... 21 Only One Spouse Qualifies for Exclusion. .................................................................................................................................... 24 Special Exclusion .................................................................................................................................................................................... 24 Other Retirement Income Exclusion Worksheet........................................................................................................................ 26 Survivors and Beneficiaries: Pension, Annuity, and IRA ................................................................................. 37 Connect With Us.................................................................................................................................................. 38

GIT-1 & 2

May 2021 2

Retirement Income Understanding Income Tax

Coronavirus-Related Distribution

New Jersey follows federal guidelines and timeframes for qualified rollovers. We will recognize a CRD as a taxfree rollover when the repayment of the CRD qualifies as a tax-free rollover for federal tax purposes. For federal details on Individual Retirement Arrangements (IRA), see Publication 590-B, and Pensions and Annuities, see Publication 575.

Reporting Distributions

The Division is flexible in reporting CRD distributions. You can report income over three years or in one year (the year of distribution). In either case, you must use State reporting calculations to determine the New Jersey taxable and excludable amounts, since most retirement plans include previously taxed contributions.

Keep Your Records

Keep records of your reporting history since you will need this information to calculate your retirement income on your return after you begin receiving regular distributions.

Distribution Recontributed and Repaid Timely

You can claim a refund for income taxes paid on a CRD distribution when it was repaid on a timely basis, and you are qualified to do so for federal purposes. File an amended return(s) to exclude the CRD income you originally reported. You should also include revised federal Form 8915-E.

Common Retirement Plans Discussed in this Guide

? Pensions and Annuities ? Individual Retirement Accounts (IRAs): Traditional or Roth ? Section 401(k) Plans ? Section 457 Plans ? Section 403(b) Plans

Calculating Taxable and Excludable Amounts: Pensions and Annuities

Generally, your pension and annuity income, whether from a noncontributory or contributory plan, is taxable and must be reported on your New Jersey Income Tax return. In some cases, the taxable amount of pension or annuity you show on your New Jersey return may differ from the taxable amount on your federal return.

GIT-1 & 2

May 2021 3

Retirement Income Understanding Income Tax

Keogh plans and State, local government, teachers', and federal pensions are all treated the same as private sector employee pensions and annuities. You must report any "early retirement benefits" and any pension payments on Schedule NJK-1, Partnership Return Form NJ-1065, as taxable income.

Noncontributory Plans

Noncontributory plans do not require an employee to make contributions toward their retirement. Payments you receive from such a plan are fully taxable because you never paid tax on any of the funds in the plan. You will report on your return the total amount of pension or annuity income shown on your Form 1099-R.

Contributory Plans

Contributory plans require employees to make contributions. In most cases, your pension contributions are made through salary deduction and are included in your total income.

The total value of your pension or annuity consists of:

? Your contributions; ? Your employer's contributions, if any; and ? Earnings. Generally, your personal contributions to your pension or annuity are taxed while you are still working. Because those contributions were taxed once, New Jersey will not tax them again. Therefore, you may exclude from income the part of a pension or annuity payment that represents contributions that already have been taxed. However, any amount you receive that exceeds your previously taxed contributions must be reported as taxable income. You must determine the taxable and excludable portions of payments you receive from a pension or annuity to which you have made contributions.

Three-Year Rule Method or the General Rule Method

There are two methods taxpayers can use to calculate pension income: the Three-Year Rule and the General Rule. (See explanations below). To determine which one to choose, complete Worksheet A. If you do not use the correct method to determine taxable and excludable portions of your pension or annuity, you may owe additional tax, penalty, and interest. If your retirement account is a 401(k) Plan, review the information about Section 401(k) Plans before continuing.

GIT-1 & 2

May 2021 4

Retirement Income Understanding Income Tax

Worksheet A Which Pension Method to Use 1. Amount of pension you will receive during the first three years (36 months) from the date of the first payment ............................................... 1. 2. Your contributions to the plan ................................................................................. 2. 3. Subtract line 2 from line 1.......................................................................................... 3. (a) If line 3 is "0" or more, and both you and your employer contributed to the plan, you can use the Three-Year Rule Method. (b) If line 3 is less than "0," or your employer did not contribute to the plan, you must use the General Rule Method.

(Keep for your records)

Three-Year Rule Method

Under this method, you may exclude from taxable income all pension and annuity payments you receive until they equal the amount you contributed to the plan while you were working. Your recovery period ? the time it takes to recover your contributions to the plan ? begins on the date of your first pension payment and can last up to three years (36 months).

Use the Three-Year Rule Method to determine your New Jersey taxable and excludable pension income if: 1. You will receive an amount equal to or greater than your pension and annuity contributions within 36 months of the date you receive your first payment; and 2. Your employer contributed to the plan.

Once you receive the amount you contributed to the pension or annuity, all future payments you receive are fully taxable. (See example.)

General Rule Method

Under this method, part of your pension or annuity payment is excluded from taxes, and part of it is taxable. (The excludable portion of that year's distribution represents your contributions.) Use Worksheet B to determine the taxable and excludable portions of your pension or annuity payment.

GIT-1 & 2

May 2021 5

Retirement Income Understanding Income Tax

You must use the General Rule Method to determine your New Jersey taxable pension income when: 1. You will not recover all your personal contributions within 36 months of the date you receive your first payment from the plan; or 2. Your employer did not contribute to the plan.

Worksheet B General Rule Method 1. Your previously taxed contributions to the plan ................................ 1.___________________ 2. Expected return on contract* .................................................................... 2.___________________ 3. Percentage excludable (Divide line 1 by line 2) .................................. 3.___________________% 4. Amount received this year .......................................................................... 4.___________________ 5. Amount excludable (Multiply line 4 by line 3. Enter here and on Line 20b, Form NJ-1040) ........................................ 5.___________________ 6. Taxable amount (Subtract line 5 from line 4. Enter here and on Line 20a, Form NJ-1040) ........................................ 6.___________________

*The expected return on the contract is the amount a plan participant is likely to receive over many years. If life expectancy is a factor under your plan, you must use federal actuarial tables to calculate the expected return. The federal actuarial tables are contained in Internal Revenue Service Publication 939, General Rule for Pensions and Annuities. Contact the IRS for this publication. If life expectancy is not a factor under your plan, the expected return is found by totaling the amounts to be received.

(Keep for your records)

GIT-1 & 2

May 2021 6

Retirement Income Understanding Income Tax

Example

James Henderson, a New Jersey resident, just retired and is receiving an annual pension of $7,000. He contributed $20,000 to his pension, and his employer also contributed. James can use the Three-Year Rule Method to calculate the taxable amount of his pension income because he will receive $21,000 within 36 months of the date of the first payment, which exceeds his $20,000 contribution to the plan.

Worksheet A Which Pension Method to Use

1. Amount of pension you will receive during the first three years (36 months) from the date of the first payment ............................................... 1.

2. Your contributions to the plan................................................................................. 2.

3. Subtract line 2 from line 1 ......................................................................................... 3. (a) If line 3 is "0" or more, and both you and your employer contributed to the plan, you can use the Three-Year Rule Method. (b) If line 3 is less than "0," or your employer did not contribute to the plan, you must use the General Rule Method.

(Keep for your records)

21,000 20,000

1,000

Using the Three-Year Rule Method, James will exclude pension payments from the New Jersey income he reports. His future pension payments become fully taxable. He will report his pension as follows:

Recovery Period

Year 1 Year 2 Year 3 Year 4 and after

Taxable Pension

$ 0 0

1,000 7,000

Excludable Pension $7,000 7,000 6,000 0

If James were a nonresident, he would not report the excludable portion of his pension payment on Form NJ1040NR column A ? only the taxable portion.

If his contributions to the pension plan were $20,000 and his annual pension amount were $4,000, he would use the General Rule Method because he would not recover all of his contributions within 36 months after the first payment. Using Worksheet B, he would calculate the percentage of pension payment he can exclude from New Jersey income each year.

GIT-1 & 2

May 2021 7

Retirement Income Understanding Income Tax

Contributions Prior to Residence

Any contributions you made to a pension or annuity before you moved to New Jersey are treated, for tax purposes, the same as if you had lived in New Jersey when you contributed to the pension. Contributions to plans other than 401(k) Plans are considered to have been previously taxed.

Lump Sum Distributions

When you receive a lump-sum distribution of the entire balance from a qualified employee pension, annuity, profit-sharing, or other plan, the amount that exceeds your previously taxed contributions to the plan must be included as income in the year you receive them. New Jersey has no provisions for income averaging of lumpsum distributions.

IRA Contributions

An IRA is a personal savings plan in which you set aside money for retirement. The portion of your IRA withdrawal that is taxable for New Jersey purposes may differ from the federal amount.

The New Jersey Gross Income Tax Act does not contain provisions similar to the Internal Revenue Code that allow an individual to deduct contributions to an IRA.

Traditional IRA

Your contributions to an IRA are subject to New Jersey Income Tax in the year they are made.

Roth IRA

Your contributions to a Roth IRA are subject to New Jersey Income Tax in the year they are made.

Rollovers

If you qualify to convert an existing IRA to a Roth IRA for federal tax purposes, you also qualify for New Jersey tax purposes, even if your New Jersey taxable income is more than the federal limitations. You can withdraw all or part of the assets from a traditional IRA and reinvest them in a Roth IRA. In most cases, your contributions to a traditional IRA were previously taxed. Only the earnings are taxable to New Jersey in the year you roll over the funds. Any amount you roll over from a traditional IRA to a Roth IRA that was not previously taxed by New Jersey ? such as a rollover distribution to an IRA from an employer's 401(k) Plan ? must be included in your New Jersey income in the year that you withdraw the funds from the traditional IRA. This includes a rollover distribution from an employer's 401(k) Plan to an IRA. However, a direct rollover from a 401(k) to a traditional IRA is not taxable.

GIT-1 & 2

May 2021 8

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download