Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
Re: Unrecovered Contributions
Posted by: stewartb, February 25, 2017 11:13AM
"You need to enter your parents contributions only the FIRST year of using Worksheet "C". For the second and all years following, the numbers will flow forward into Worksheet "C" from the worksheet "C" of the previous year."

I disagree with the above as this is an Inherited IRA and only the 2nd year that I as beneficiary am receiving the RMD. What you describe above is the scenario if either one of my parents or both were taking RMDs

Re: Unrecovered Contributions
Posted by: Benn, February 25, 2017 07:27PM
There are three terms that are equivalent: "Previously Taxed Contributions", "Unrecovered Contributions", and "Basis". The Previously Taxed Contribution amount has been in the IRA account since the time that the contributions were made. It starts to come out of the account when distributions finally commence. It is irrelevant as to whether the distributions are taken by the original owner or by the beneficiary who inherits the account. That is why the total of the Previously Taxed Contributions is entered into NJ Worksheet "C" line 4a the first year that anyone takes a distribution, either owner or beneficiary.

In the event that the total of Previously Taxed Contributions is not known, a value of zero is assumed, with the result that all distributions are taxable. But since you stated that you have records of the contributions, you should be able to total them up and enter appropriately.

In your situation, you previously stated that "[t]he first year's RMD was 100% taxable on my 2015 NJ 1040." You actually paid too much tax to New Jersey due to not using Worksheet "C" correctly. So if your 2015 tax is audited by NJ they would have no reason to object. But for tax years after 2015, you are subject to audit in case you don't follow Worksheet "C" and don't pay enough tax to NJ as a result. It may even be that audits by NJ for inherited IRA calculations may be rare. The decision of how to proceed is up to you, but I would recommend that you follow the requirements of Worksheet "C" as the safest course of action.



Re: Unrecovered Contributions
Posted by: Benn, February 25, 2017 08:12PM
I'm also assuming that you don't qualify for the NJ Pension Exclusion. That would affect the taxability of your IRA distributions if it applies.

Re: Unrecovered Contributions
Posted by: stewartb, February 26, 2017 05:22PM
I'm also assuming that you don't qualify for the NJ Pension Exclusion. That would affect the taxability of your IRA distributions if it applies.

Im not sure yet if qualify for the Pension Exclusion. I believe it's a $20K exclusion? Last year 2016 was the first year I rcd taxable annuity beneficiary payouts totaling $11,106.51 on my 1099-Rs line 2a. For 2016 the Inherited IRA payout was only $717.82

Re: Unrecovered Contributions
Posted by: Benn, February 26, 2017 07:31PM
The NJ Pension Exclusion applies for all or a part of the income received during the year from taxable pensions, annuities, and IRA withdrawals, if you qualify as follows:

1. You (and/or your spouse, if filing jointly) were 62 or older or disabled as defined by Social Security guidelines on the last day of the tax year; and
2. Your total income for the entire year was $100,000 or less.

If you qualify, the pension exclusion amount you may claim for Tax Year 2016 is the lesser of:

1. Your actual taxable pension income; or
2. The maximum pension exclusion amount for
your filing status:

$20,000 Married/CU couple, filing joint return
$15,000 Single; Head of household; Qualifying widow(er)/Surviving CU partner
$10,000 Married/CU partner, filing separate return

NJ also has two further pension exclusions, called the
"Other Retirement Income Exclusion Parts I and II" for taxpayers older than 62 and with several other limitations.

For further information about any of the NJ pension or retirement exclusions see the the publication NJ GIT-1 with the following link:

[www.state.nj.us]





Re: Unrecovered Contributions
Posted by: stewartb, February 26, 2017 11:46PM
I qualify for the $15,000 exclusion limit, taxable portion of all inherited beneficary annuities 11,106.51 on my 1099-Rs line 2a. For 2016 the Inherited IRA payout was only $717.82. But I still should be calculating, taxable portion of my IRA Line 19a on my NJ 1040, right?

Re: Unrecovered Contributions
Posted by: stewartb, February 28, 2017 07:20PM
I gave you all the numbers yet you have NOT been able to come up with a completed Worksheet C. Sorry but all you gave here is repitition of definitions which I already know. If you know how to actually complete the worksheet & apply these definitions you would be able to tell me where to plug in these numbers

Re: Unrecovered Contributions
Posted by: stewartb, March 1, 2017 02:21PM
Benn Wrote:
-------------------------------------------------------
> This is not the correct meaning. The term is
> Unrecovered CONTRIBUTIONS, not Unrecovered
> DISTRIBUTIONS.
>
> In the year when the very first IRA distribution
> or withdrawal is received, the total of all IRA
> contributions ever made to the account is entered
> as "Unrecovered CONTRIBUTIONS" into NJ Worksheet
> "C", line 4a. You will need to find this value in
> your records or reconstruct it from earlier IRA
> account statements. The worksheet also calls this
> amount "contributions that were previously taxed".
> The meaning is that all IRA contributions were
> previously taxed by NJ, so this is the initial
> value of "Unrecovered Contributions". Note that
> you will be "recovering" your contributions a
> little bit each year as you receive your required
> minimum distributions. Each year you will receive
> back a portion of your contributions as part of
> each RMD, so the portion of each RMD representing
> your original contributions will not be taxed upon
> withdrawal. Worksheet "C" performs the
> calculation of the tax-free portion of each
> distribution or withdrawal. The taxable portion
> of each distribution is actually the portion
> representing earnings of the IRA account and not
> the amounts you originally contributed or
> deposited to the IRA.
>
> After the first your of IRA distributions, The
> results generated by NJ Worksheet "C" will flow
> forward to the following year without reference to
> any historical records. After the first year line
> 4b and Part II will be used instead of line 4a in
> Worksheet "C". At this point the only inputs will
> be from the previous Worksheet "C" and any current
> year activity.


Following closely what you say here Benn in my own example, 2015 was my first year of Inherited IRA withdrawals in the form of an RMD in the amount of $2002.87, Line 2. Value of the IRA 12/31/15 was $16,294.46, Line 1.
The total of all IRA contributions ever made to the account is entered as "Unrecovered CONTRIBUTIONS" into NJ Worksheet "C", line 4a is $23,000. Line 3 Total value of IRA add lines 1 & 2. $18,297.33 According to the Worksheet Line 5. Accumulated earnings in IRA on 12/31, subtract line 4a. $23,000 from Line 3 $18,297.33. Line 5 is less than "0" could this be right?? Finally the Worksheet that makes Line 7 "0" as taxable portion of this year's withdrawal. That cant be right

Re: Unrecovered Contributions
Posted by: Sven, March 1, 2017 11:29PM
I have the feeling ( Alan, help!) inherited IRA's get different treatment in NJ than non-inherited ones. To keep life simple for people who follow these posts and try to learn the general rule, especially confused NJ folks like me, all I can suggest is take the time and come up with a hypothetical, as several responders have done. Do one for a non-inherited IRA. Once you get the drift of what NJ does, and it is very drifty, work up the nerve to go through an example involving an inherited IRA if you happen to be in that boat. Stewardb obvious is, but my guess is most people are not.

I have to take my first MRD this year and have already started collecting contribution info and am playing with the NJ forms. At some point I will create my own spreadsheet to do the math. I am still living there only because NJ is deep-sixing its estate tax in less than a year. The plan had been to dump the high property tax house here and move to the low property tax beach house in Maine. They effectively did away with their estate tax a couple of years ago. But if you think NJ income tax is high, take a look at Maine's income tax sometime. So you pay, one way or the other.

Re: Unrecovered Contributions
Posted by: stewartb, March 2, 2017 01:58AM
Sven, has nothing to do with inherited or your own TIRA. The Worksheet C is confusing, esp unrecovered contributions. Ive given them all the numbers here but no one is able to give me answers except to recite def of terms... Wheres LJM when you need him...

Re: Unrecovered Contributions
Posted by: Benn, March 2, 2017 02:14AM
Stewardb, let me work with your specific numbers. Please confirm or correct the following:

1. Assuming that no withdrawals or distributions were made by you before 2015, or by your parent who previously owned the account. Please confirm.

2. Value of IRA on 12/31/2015 was $16,294.46. Please confirm.

3. IRA RMD withdrawal during year 2015 was $2,002.87. Please confirm.

4. Total of all contributions ever made to the IRA by your parent before passing was $23,000. Please confirm.

5. Also please advise the amount that was withdrawn or distributed from the same IRA during year 2016.

6. Further, you don't state the account value on 12/31/2014, but it looks like it was approximately $18,300, unless there were large losses or gains early in 2015. Please advise the actual value on 12/31/2014.

If all of the above is correct, it means that the account has decreased in value probably due to investment fluctuations or losses over the past years. This can be seen since your New Jersey "basis" of $23,000 is larger than the assumed account value on 12/31/2014. This would mean that your withdrawals or distributions are totally NJ tax-free. Now that I see some of the numbers this has become clear. This would be the case regardless of any NJ retirement deductions. Your New Jersey "basis" looks like it is now 100%. Therefore all withdrawals or distributions from this IRA are free of NJ tax.

You will still need to take RMD distributions each year in accordance with the RMD formula. I also wonder how you calculated the RMD amount, since looks possibly incorrect.




Re: Unrecovered Contributions
Posted by: stewartb, March 2, 2017 02:28PM

Thank you Benn. I'll respond to each point:

1. Assuming that no withdrawals or distributions were made by you before 2015, or by your parent who previously owned the account. Please confirm.

My parents took yearly RMDs beginning with my dad's 71st birthday. He was born in year 1919

2. Value of IRA on 12/31/2015 was $16,294.46. Please confirm.

Yes Value of IRA (FMV) 12/31/15: $16,294.46

3. IRA RMD withdrawal during year 2015 was $2,002.87. Please confirm.

Yes 2015 RMD was $2,002.87. Was high because it was based on mom's life expectancy. She was 93

4. Total of all contributions ever made to the IRA by your parent before passing was $23,000. Please confirm.

Yes that's correct, $23,000 PARENTS'LIFETIME CONTRIB.

5. Also please advise the amount that was withdrawn or distributed from the same IRA during year 2016.

2016 Inherited RMD was 717.82

6. Further, you don't state the account value on 12/31/2014, but it looks like it was approximately $18,300, unless there were large losses or gains early in 2015. Please advise the actual value on 12/31/2014.

IRA FMV 12/31/14: $18,226.13

This was while my mom was alive and well and she was receiving her RMD. Why do you need this value?

If all of the above is correct, it means that the account has decreased in value probably due to investment fluctuations or losses over the past years. This can be seen since your New Jersey "basis" of $23,000 is larger than the assumed account value on 12/31/2014. This would mean that your withdrawals or distributions are totally NJ tax-free. Now that I see some of the numbers this has become clear. This would be the case regardless of any NJ retirement deductions. Your New Jersey "basis" looks like it is now 100%. Therefore all withdrawals or distributions from this IRA are free of NJ tax.

I agree, if the above amounts are correct (and they are) I double checked, it appears none of my Inherited RMD was or will be taxable.
The accountant preparing my return was wrong. He put the entire amount $2002.87 as income. However it's a moot point since the $15,000 exclusion means it was NOT counted as income

Can you, will you do the Worksheet here so I can confirm this?

You will still need to take RMD distributions each year in accordance with the RMD formula. I also wonder how you calculated the RMD amount, since looks possibly incorrect.
The first year Inherited RMD, 2015 was calculated before my mom passed in Sept 2015. She was 93. Based on her age therefore it was $2002.87 and sent to me
The 2nd year 2016 Inherited RMD was based on my age 63 and based on my life expectancy it was naturally smaller to last over a longer expected life expectancy.

My gut feeling is that most accountants preparing NJ returns "flub" this Worksheet C and just calculate the taxable IRAs Line 19a of NJ 1040 as a completely taxable, which in most cases it is NOT.

Most people dont know these amounts that I've given you here. It's decidedly difficult to keep track of.

However, since there is a $15,000 pension & IRA exclusion limit for a single filer, it's a moot point. It gets excluded as income. Unless your pension & IRAs are greater than the exclusion limits.

After I'm 70, my RMDs both Inherited & my own, may put me over the exclusion limit. However I understand the exclusion limit for 2017 and beyond goes up to $30,000 for single filers.

Please calculate the Worksheet C for me here, with these numbers so that I can confirm. I thank you for ALL YOUR WORK

Donít you need my parents Lifetime Distributions (RMD) up to and including year 2014: $54,577.77 to do my Worksheet C for year 2015 & 2016?



Re: Unrecovered Contributions
Posted by: stewartb, March 3, 2017 06:08PM
Benn
Are you sure Line 4a of Worksheet C, "total of IRA contributions that were previously taxed" on the first year of my Inherited IRA, (2015) is my parents' lifetime IRA contributions, or $23,000 ?

This would mean that every year's RMD is NOT taxable, until yearly RMDs reduce basis, $23,000 to the point it is less than the total value of the IRA. That would be many years from now.

Re: Unrecovered Contributions
Posted by: Benn, March 3, 2017 06:50PM
With your latest comments I'm seeing a difference from the way you described the matter previously. Previously you implied that RMDs were not taken before you inherited the account. Now it looks like there were earlier RMDs taken. A further question is how many IRA accounts were are discussing here? Are there accounts from both your father and mother? Did an account become transferred between your parents when the first one passed on? How many accounts do you have now? Or what, specifically? So for a correct analysis it would be necessary for you to describe the exact history of all IRA accounts, including the original owners, to whom they were transferred, and specific dates. Also age of each decedent at the time of death. I'm sorry if this seems like at lot of data, but this is what is needed

It would be best to hold off on the other questions pending these clarifications.

Re: Unrecovered Contributions
Posted by: stewartb, March 4, 2017 02:06AM
How would such answers to your questions change things? Why would you assume my parents never took their RMDs?
My father had many years of contributions to IRAs, including the maximum he could contribute filing jointly with my mom. And of course he took RMDs as required after the age of 70 1/2 until his death in 2005. After his passing my mom continued taking the RMDs as required until her death in 2015.
How does this change things?

Re: Unrecovered Contributions
Posted by: Benn, March 4, 2017 06:37AM
Thanks for the clarification. It now appears that the IRA originally belonged to your father. Your mother inherited the IRA when your father passed, and then you inherited it from your mother.

The following should summarize and conclude the description of your issue.

You say that the total amount of RMDs that were received from the IRA by both of your parents was $54,577.77. IN THE EVENT THAT the total amount was reported as taxable on line 19a on form NJ-1040 for all years of RMD distributions to your parents, then you can now take credit for the basis, or original contributions that were previously taxed by New Jersey.

For your 2015 tax year, you took a RMD of $2,002.87 and had a balance of $16,294.46. The total of these two amounts is $18,297.33, which is less than your New Jersey basis of $23,000. No further calculations would be needed.

Therefore, you could have taken the 2015 RMD as excludable, and could have reported it on line 19b of form NJ-1040 instead of line 19a.

You might have also been able to exclude the RMD under the NJ pension exclusion if you qualify.

You may be able to do an amendment for 2015, but it would probably not be worthwhile.

Since your total 2015 RMD was reported as taxable you still have a basis of $23,000 remaining for 2016 and later years.

Therefore, for your 2016 tax year the total of your 2016 RMD and the account value on 12/31/2016 will also be less than your basis of $23,000. Your RMD for 2016 will likewise be excludable, and should be reported on line 19b of NJ-1040.

Since you have a basis greater than your account value your calculations for Worksheet "C" for 2016 will be as follows:

Line 1: Value of IRA on 12/31/2016

Line 2: Distributions during year 2016 = $717.82

Line 3: Sum of Line 1 + Line 2

Line 4a: Total of all IRA Contributions previously taxed by NJ = $23,000

Line 5: Accumulated earnings in IRA on 12/31/2016 = Line 3 - Line 4a = 0 (can't be negative)

Line 6: Divide Line 5 by Line 3 = 0

Line 7: NJ taxable portion of this year's withdrawal = Line 2 * Line 6 = 0

Line 8: NJ excludable portion of this year's withdrawal = Line 2 - Line 7 = $717.82

The calculation of Worksheet "C" for 2016 will be unnecessary if you qualify for the NJ pension exclusion.

Next year you will use Part II of Worksheet "C", but the result will also be a zero taxable amount since the basis is greater than the account balance, unless your investments reap a phenomenal gain.

The use of Worksheet "C" is probably not required since the amount of NJ basis is greater than your account value.

Therefore, the conclusion is that this IRA will not generate any NJ tax, either due to the high basis or due to the NJ pension exclusion.

Thank you for allowing me to address the questions in your posting.


Re: Unrecovered Contributions
Posted by: stewartb, March 4, 2017 02:54PM
Thank you Benn but I believe the 2nd year the basis is less than $23,000.
If you read Worksheet C you'll see that the 2nd year of filling it out and all years thereafter you do NOT use Part I Line 4a, you go to Part II and lines a thru g top figure Line 4b, not using 4a. Therefore you will see you start off with last year's basis, Part II ( a) $23,000 and subtract the total distribution for the year, in my case the RMD or $717.82 and the new basis becomes $22,282.18
Each year thereafter you begin with last year's new basis and subtract whatever distributions you take during the year, in my case whatever the yearly RMD was.
Do you see this? Please let me know and thanks

Re: Unrecovered Contributions
Posted by: Benn, March 4, 2017 09:51PM
You previously said that "[t]he first year's RMD was 100% taxable on my 2015 NJ 1040" (2/22/17 3:50PM). That statement indicates that NJ Worksheet "C" was not filled out when you filed your 2015 tax. Consequently, your first Worksheet "C" will be for your 2016 tax with the numbers I gave you in my previous posting. You won't use Part II until you do Worksheet "C" next year, when you are working your 2017 tax about one year from now in 2018.

But you should also understand that Worksheet "C" is not needed since the amount of NJ basis is greater than your account value. Your NJ distributions from the IRA you inherited from your mother consist totally of basis, and are therefore excludable, or non-taxable by NJ.

Thus, the IRA you inherited from your mother will not generate any NJ tax, either due to the high basis in the account or due to the NJ pension exclusion if you qualify.

Re: Unrecovered Contributions
Posted by: stewartb, March 4, 2017 11:46PM
Obviously the first year's Worksheet C was wrong. However that said, the instructions clearly state that all subsequent years must use Part II to calculate Part I 4b, no longer using 4a. By using Part II you can see that each year's RMD diminishes the basis. Therefore there may come a year when the basis is less than the FMV on 12/31 plus that year's RMD, thus some portion of the RMD or all may be taxable may be taxable.

So I redid the first year's Worksheet C the correct way using my parents, $23,000 as the basis and of course, first year's RMD, $2002.87 is totally non taxable, but Im not amending the return since it got excluded anyway due to $15,000 pension exclusion.

I did the second year the correct way using Part II lines a thru g, to calculate Part I 4b, the way it's supposed to be done.The basis gets reduced by the RMD every year.

Each succeeding year is done this way, Part II lines a thru g to figure Part I 4b. Each year's RMD reducing the basis. A day may come if I live long enough when the RMD is large enough to reduce the basis enough to make the RMD either partially or totally taxable.

Re: Unrecovered Contributions
Posted by: stewartb, March 7, 2017 06:20PM
Benn, Hopefully you can read my last post and comment...thanks



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