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An open question to fellow NJ tax return preparers. Consider the following example –
John Q Taxpayer was a police officer for a New Jersey municipality for 25 years. He retired from the force and took a job in the public sector.
During his employment as a police officer he contributed to the state pension fund, and also contributed to the Deferred Compensation Plan for municipal employees. The employee contributions to the state fund and municipal plan were considered to be “pre-tax” for federal income tax purposes, but not for NJ state income tax purposes. His contributions reduced the federal wages reported in Box 1 of his annual W-2, but did not reduce the state wages.
Upon retirement John began to draw a regular monthly pension check from the New Jersey Division of Pensions. He is not required to take money from the Deferred Comp Plan until age 70½, although he can request distributions from this plan in any amount at any time.
On the NJ-1040 John used the “3-Year Rule” to recover his “after-tax” contributions to the state pension fund. Once all of his contributions were recovered, within two years as it turned out, he reported 100% of his pension distributions as income on his NJ-1040.
John wanted to purchase a new automobile a few years after retiring. Rather than getting an auto loan he decided to take the money for the car from his Deferred Compensation Plan. He withdrew $27,000, $7,000 of which was withheld for federal income taxes. This $27,000 was a one-time withdrawal. He did not “annuitize” the balance in his account, taking out $27,000, or any amount, each year thereafter. In the two year after the $27,000 was withdrawn he took nothing whatsoever from this plan, and does not plan to do so until required unless a special need arises (like the car).
The $27,000 was fully taxed on his federal Form 1040, as all of his contributions to the plan while employed were “pre-tax” for federal income tax purposes. But how much does he report as taxable on his NJ-1040?
The NJ-1040 instructions indicate there are two methods of recovering “after-tax” contributions. First there is the “3-Year Rule”. That does not apply here. The other method is to deduct his contributions evenly over a pre-determined “life”. It appears that would also not work – as the withdrawal was a one-time deal.
The only method for applying after-tax contributions to the one-time distribution is the one that the State of New Jersey allows for determining the taxable portion of IRA distributions, even though the Municipal Deferred Compensation Plan is not an Individual Retirement Account.
How would you calculate the state taxable portion of the $27,000 one-time withdrawal if this was your client? You can submit your answer as a Comment to this post, or via email to rdftaxpro@yahoo.com.
TAFN
An open question to fellow NJ tax return preparers. Consider the following example –
John Q Taxpayer was a police officer for a New Jersey municipality for 25 years. He retired from the force and took a job in the public sector.
During his employment as a police officer he contributed to the state pension fund, and also contributed to the Deferred Compensation Plan for municipal employees. The employee contributions to the state fund and municipal plan were considered to be “pre-tax” for federal income tax purposes, but not for NJ state income tax purposes. His contributions reduced the federal wages reported in Box 1 of his annual W-2, but did not reduce the state wages.
Upon retirement John began to draw a regular monthly pension check from the New Jersey Division of Pensions. He is not required to take money from the Deferred Comp Plan until age 70½, although he can request distributions from this plan in any amount at any time.
On the NJ-1040 John used the “3-Year Rule” to recover his “after-tax” contributions to the state pension fund. Once all of his contributions were recovered, within two years as it turned out, he reported 100% of his pension distributions as income on his NJ-1040.
John wanted to purchase a new automobile a few years after retiring. Rather than getting an auto loan he decided to take the money for the car from his Deferred Compensation Plan. He withdrew $27,000, $7,000 of which was withheld for federal income taxes. This $27,000 was a one-time withdrawal. He did not “annuitize” the balance in his account, taking out $27,000, or any amount, each year thereafter. In the two year after the $27,000 was withdrawn he took nothing whatsoever from this plan, and does not plan to do so until required unless a special need arises (like the car).
The $27,000 was fully taxed on his federal Form 1040, as all of his contributions to the plan while employed were “pre-tax” for federal income tax purposes. But how much does he report as taxable on his NJ-1040?
The NJ-1040 instructions indicate there are two methods of recovering “after-tax” contributions. First there is the “3-Year Rule”. That does not apply here. The other method is to deduct his contributions evenly over a pre-determined “life”. It appears that would also not work – as the withdrawal was a one-time deal.
The only method for applying after-tax contributions to the one-time distribution is the one that the State of New Jersey allows for determining the taxable portion of IRA distributions, even though the Municipal Deferred Compensation Plan is not an Individual Retirement Account.
How would you calculate the state taxable portion of the $27,000 one-time withdrawal if this was your client? You can submit your answer as a Comment to this post, or via email to rdftaxpro@yahoo.com.
TAFN
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