After you enter your 1099-R, you'll encounter a screen that asks Where is this distribution from. If you qualify, check
Three-year rule: You may use this method if you will recover all of your contributions to the plan within 36 months from the date you receive your first payment from the plan, and both you and your employer contributed to the plan. Benefits based on your contributions are not taxable in New Jersey, but benefits based on your employer's contributions are fully taxable.
When using the Three-year Rule Method, your pension is nontaxable until the payments you receive from the plan equal the amount you contributed. Once you have received an amount equal to your contributions, all payments from the pension plan are fully taxable.
When you go to your state return, you will reach a screen Three-Year Rule Method where you'll be able to enter the amount your annuity cost, and how much of the cost you've recouped so far.
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