This is a difference between Federal and NJ income tax treatment. For federal income tax purposes, payroll contributions to nonqualified retirement plans are EXCLUDED from income when made; distributions are fully taxable as income when distributed. For NJ income tax purposes, payroll contributions to nonqualified retirement plans are INCLUDED as income when made; distributions are taxable only for amounts that exceed the previously taxed contributions.
My W-2 includes the nonqualified distributions as both wages (box 1) and as a nonqualified plan distribution (box 11). After entering the W-2, Turbotax asks me to confirm whether the distribution is from a nonqualified pension plan (which it is), but then goes on to a different topic.
I've been playing around with Turbotax and confirmed that if the nonqualified pension distribution was reported on a 1099-R instead of a W-2, turbotax would immediately follow up with screens asking "Where Is This Distribution From" for NJ purposes and "Was This Distribution from a Qualified Plan?" The NJ interview would follow up by asking for my cost basis in the nonqualified plan (i.e., the amount of contributions previously taxed), and then would correctly calculate the portion of the distribution that is taxable.
So the problem I have is that even though Turbotax asks (as part of the W-2 input) whether the amounts reported represent a distribution from a non-qualified pension plan, none of the other NJ questions for nonqualified pension distributions (described in the paragraph above) are asked, and turbotax incorrectly treats the entire nonqualified distribution as taxable. I believe that this is a programming error and am not sure how to get Turbotax to fix this.
