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: Benn, March 8, 2017 01:45AM
Looks like you are on the right track. But it may happen that you will always be covered by the NJ pension exclusion, since it will now increase each year until 2020, when it will reach $75,000 for single filers. You will need some phenomenal growth in your IRA investments to reach the point where the tax numbers from Worksheet "C" will become an issue. That will be something to aspire toward, and I wish you good luck toward that goal.

Re: Unrecovered Contributions
Posted by: stewartb, March 8, 2017 12:03PM
The inherited IRA & inherited annuities are the only distributions I'm receiving right now. However after 70 I'll be receiving distributions from my own annuities & IRAs, some of which will be RMDs &all of which may put me over the pension exclusion limit for a single filer. In which case determining the taxable amount via Worksheet C will become more significant.

I was more concerned with your analysis of my calculations using Worksheet C this last go round. Do you have any comments?

I wrote the NJ Division of taxation & here was their response:
"Yes, you would need that information: your parents' lifetime contributions to & distributions from all their IRAs to complete Worksheet C IRA Withdrawals and determine the taxable portion of your IRA distribution.

Thank you for contacting the New Jersey Division of Taxation."

Benn, Im having my taxes done tmrw, Monday so if you could please reply before noon tmrw, much appreciated

Re: Unrecovered Contributions
Posted by: stewartb, March 17, 2017 12:17PM
After consulting with the NJ Division of taxation, it looks like all previous discussions were WRONG. For first year inherited IRA, I would complete the bottom of Worksheet C. to complete Part 1 4b unrecovered contributions, using both my parents' lifetime contributions and lifetime distributions. Thereafter I would complete Part II to figure Part I 4b.

Any comments Benn?

Re: Unrecovered Contributions
Posted by: Benn, March 18, 2017 06:09PM
In several of your postings you mentioned that you and your parents received RMDs as taxable. That would mean that no previous NJ tax returns should show an entry for these IRAs on line 19b of NJ-1040. It this is truly the situation, then the procedure in the footnotes at the bottom of Worksheet C will give the exact same results as going directly to line 4a of the worksheet.

You first mentioned that your father and mother both were taking RMDs from this IRA on March 4, after much earlier discussion had occurred. If you now have information showing that your parent's RMDs were reported with entries on both lines 19a and 19b of NJ-1040, then the footnote procedure would be applicable.

The footnote procedure applies to situations where the taxpayer neglected to use Worksheet C in earlier years. This is a recovery procedure to allow the taxpayer to get back on track. But it would only apply if there have been entries on line 19b in prior years.

However, the entire procedure of Worksheet C is not applicable to you since your pension distributions are within the NJ Pension Exclusion this year. Since the NJ Pension Exclusion will be increasing by a factor of 5 in future years, you will probably remain within the exclusion in future years, unless your income increases quite dramatically.

Re: Unrecovered Contributions
Posted by: Alan S., March 18, 2017 08:19PM
This thread is a great testimonial to the effects of faulty tax policy.

Deviating from federal tax treatment on just about anything creates a major hassle for state residents in filing their returns. Worse yet, once the legislative policy error is recognized, it is almost impossible to equitably unwind it, so it continues for decades. There are around 10 states that are major perpetuators of these issues, and most people are quite aware of which ones they are.

I assume that the time and effort to check these worksheets by the NJ tax authority has probably been recognized as non productive, so they probably are only looking at certain returns with real big numbers.

Certainly, a given state may want to increase tax revenue but rather than reacting individually to each piece of federal legislation and carving out a state exception, it would be far more efficient to simply increase the state tax rate. Easier to prepare returns and easier to review them. Maybe not so good for paid preparers though.

Rant concluded! :)

Re: Unrecovered Contributions
Posted by: stewartb, March 18, 2017 09:41PM
I agree wholeheartedly with you Alan. Look how many attempts it took to finally get it right... and who knows it still may be wrong.

NJ Worksheet C Ira Withdrawals is ambiguous at best. Flawed at worst. For an inheriterd IRA, why must I go thru all my parents' lifetime contributions & lifetime distributions just to find an amount which is excluded anyway? Are they kidding? Whats the point? And I guarantee you nobody, at least not anyone using a tax program is calculating this...

Re: Unrecovered Contributions
Posted by: Benn, March 18, 2017 09:47PM
Experience has shown that it is a rare taxpayer indeed who prepares any of the NJ-only worksheets for credit for NJ basis. Stewart, you are the rare exception. Taxpayers rarely retain records showing IRA or 403(b) contributions going back several decades. The usual situation is that full NJ tax is paid when distributions are received. Double taxation of contributions is the usual result. Although the NJ instructions describe how to avoid double taxation, the NJ Taxation Division seems content to avoid issuing any public notices to alert taxpayers. Paid preparers usually follow a doctrine where they will report a distribution as fully NJ taxable unless the taxpayer shows supporting documents from many years back.

Re: Unrecovered Contributions
Posted by: stewartb, March 21, 2017 12:40AM
Luckily for me, I was able to go thru all my parents' previous years tax returns and collect data such as lifetime IRA contributions, distributions, and for the sale of a long held mutual fund that they sold in year 2001, all previous capital gain and dividends, so that they didnt pay a huge capital gains tax when they sold the fund. But really this is a huge burden to put on the taxpayer to avoid double taxation. Most people wouldnt bother to calculate this as you stated clearly, Benn. Can anything be done to put an end to this ?

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