New Jersey taxable earnings for Roth excess contribution

[pc_tt]

I have successfully entered a corrected Roth excess contribution (1099-R) on my federal 1040 and am correctly taxed only on the earnings (Box 7 codes 8J).  However, when information transfers to my NJ state return, the whole amount (excess contribution and earnings) are being taxed.  This creates multiple errors on the final check of the NJ Pensions, Annuities, and IRAs Wks in Parts A and B.  What is the process such that the NJ form only taxes the earnings?  Thank you!

[DanaB27 · Accepted solution]

You will need to report the earnings on line 20a of Form NJ-1040. To do this you will need to enter the excess contribution amount in the contribution amount previously taxed during the NJ state return:

1. On the “You've Finished Your New Jersey Return” click “Update” next to “Adjustments”
2. Continue until you get “IRA Information” screen.
3. Select “Yes, this was the first year of withdrawal from this IRA” enter the excess contribution for 2023 next to “Total of IRA contribution previously taxed”

No, it won't cause issues.

"Use the New Jersey IRA Worksheet to calculate the taxable and excludable portions of a withdrawal from a traditional IRA or nonqualified withdrawal from a Roth IRA. If you make withdrawals from several IRAs in the same year, you can use a separate worksheet for each IRA, or you can combine all IRAs on one worksheet. Report the total taxable amount, and the excludable amount if you are a resident, on your tax return. You can use the IRA Worksheets that appear in the New Jersey Income Tax return resident or nonresident instruction booklets. Do not file the IRA Worksheet with your New Jersey Income Tax return. Keep it for your Records" (NJ Retirement Income Understanding Income Tax page 12).

[pc_tt]

Thank you, DanaB27, very helpful!  This addressed the NJ return accuracy check, but there's still an issue with the taxable amount.  The excess contribution was made for TY2022 and corrected in 2023 before 4/15/23.  The distribution of the excess and taxable earnings occurred in 2023.  I've never made a qualified withdrawal from this Roth (decades from retirement age).  I tried the “Yes, this was the first year of withdrawal from this IRA” method, but the taxable amount is far more that the Federal taxable amount on the 1099-R.  I then tried the "No, I've made withdrawals from this account before", listing the original TY22 total contribution and the 2023 distribution (excess and taxable earnings) and this shows the correct taxable amount.  Will it cause an issue that I answered "No, I've made withdrawals from this account before" when TY2023 is actually the first year of withdrawal?  Thank you!

[fanfare]

The NJ calculation based on "first year" and "second or later years" is not applicable to Roth IRAs.

You need to find some other method to get the correct taxable amount on NJ tax return Line 20a,

Line 20b should be zero.

@pc_tt 

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@pc_tt 

[fanfare]

DanaB27 

is suggesting to use the NJ calculation in a way that is not intended.

If it works you can use it.

Line 20b should be zero; if it is not, you can ignore that also.

@pc_tt 

[pc_tt]

The Roth IRA was established in Tax Year 2022.  The contribution exceeded earned income for TY2022, hence the excess contribution.  The excess was corrected before 4/15/23, and the earnings + excess contribution were distributed in 2023.  A new, allowable contribution for TY2023 was made in January of 2024.  Thank you!

[lemon2]

Hi @DanaB27, in my case, I did a first time withdrawal from my Roth IRA in 2024 to correct my 2023 excess contributions.

Within the NJ state taxes section,

1. Would the 'Value of IRA on 12/31/23' be the value on my statement at the end of the year minus the withdrawal amount since I withdrew it in 2024? (Otherwise, it seems to double count my withdrawal amount in the 'Total Value of IRA' since the statement was given before my withdrawal)
2. Within 'Total of IRA contribution previously taxed', do I include the total contributions of my Roth IRA history? Or only the contributions I made while living in NJ?

Thank you!

[fanfare]

In NJ total contributions minus total withdrawals is only applicable to the first year calculation for a Traditional IRA.

If you are doing backdoor Roth IRA contributions,converting 100% each time,  every year can be considered a "first year"

If you are intending to report an amount of withdrawn Roth earnings, you are trying to trick TurboTax into the correct result on your NJ tax return.

That should not be necessary, since 1040 4b should carry over to NJ 20a immediately.

@lemon2