Turbotax is incorrectly adding non-taxable RothIRA distribution to my taxable state income

[waespym]

Hello,

I've been filing my federal and state tax returns. In 2022 I made a withdrawal from a Roth IRA account. This is the first time money has been distributed from this account and is my only retirement account. The account is NOT yet 5 years old and I am NOT 59-1/2 years or older. My 1099-R I received from the brokerage put Code J in box 7 which is correct because it's technically a "nonqualified" distribution. The total money withdrawn from the account was equal to the contributions (cost basis) to the account so the money withdrawn is non-taxable as the contributions were already taxed income. 

I added the 1099-R to the federal tax return and it worked out fine because TurboTax has filled out Part III of Form 8606 in which it subtracted my contributions/cost basis from the distributions. No federal taxes owed were calculated due to these contributions which is correct. 

The problem lies with the state tax return (NJ).  Upon starting the state return TurboTax added these contributions to my total income under "Pension Income" which is wrong. 

On the "Roth Distributions for You" page it summarizes the information I put on my federal tax return and states "Roth Distributions with Code J are taxable in NJ. Qualified exceptions on my federal return will be treated the same in NJ." My distributions are not taxable.

Next screen is "IRA Information for you". I check "Yes, this was the first year of withdrawal from this IRA". I then entered my total of "IRA Contributions Previously Taxed" which is equal to the distribution on the 1099-R. Last two boxes ask for Value of ALL Ira's on 12/31/2022 (really??) which I found from my brokerage and entered  (non zero $) and IRA Contributions made for 2022 ($0). Obviously I made non-taxable gains on my contributions that remain in the account but those were NOT withdrawn. No gains were ever withdrawn, only contributions. Somehow TurboTax has concluded based on the amount of distribution, amount of contributions, and the current value of my IRA I have hundreds of dollars in "NJ Pension" income. This is incorrect. How do I get TurboTax to correct this and remove all of this income? 

[fanfare]

" then entered my total of "IRA Contributions Previously Taxed" which is equal to the distribution on the 1099-R"

"IRA Contributions Previously Taxed"  means shown and taxed on prior NJ tax returns, so your statement is incorrect.

Since this is your first distribution, the previously taxed amount is (usually) zero.

In future, you won't get that question again after the first NJ distribution, the worksheet doesn't call for it.

[fanfare]

for a regular IRA you can't say only contributions were taken out. it is not allowed.

for a Roth IRA you can say that, up to the point you use up all the contributions.

I'm not sure how NJ treats that (Code J) since I never took money out of a Roth.

Evidently TurboTax thinks the rule is different.

All the questions you described apply to Traditional IRAs.

This is not your first distribution from a Traditional IRA.

For Roth distribution, you should bypass those entries, backing out what you entered.

For example the total value all Traditional IRAs is not relevant.

TurboTax should not be asking you for that Traditional IRA information.

@waespym 

[fanfare]

All the questions you described look like those that apply to Traditional IRAs.

my first answer above was with Traditional IRA in mind.

Since TurboTax knows it is a Roth, maybe it asks similar questions,

but the calculation would be (or should be) different for a Roth, as you point out.

(The total value of all Roth IRAs at year end does not appear to be relevant.)

Sorry for any additional confusion caused by me jumbling Roth IRA and Traditional IRAs together.

[fanfare]

If TurboTax was asking about your Roth IRAs, all references to "IRA" should have been replaced with "Roth IRA'.

[waespym]

""IRA Contributions Previously Taxed"  means shown and taxed on prior NJ tax returns, so your statement is incorrect."

Actually it is not. It is asking me if my contributions were previously taxed. Since this is a Roth IRA they were. More information is available when clicking on "Contributions previously taxed"

• Contributions previously taxed include:
  • Contributions made to an IRA while you were a resident of New Jersey
  • Contributions that did not reduce the income on your federal return in the year they were made
  • Contributions that did not reduce state income in another state

Since this was a RothIRA these contributions did not reduce the income like contributing to a Traditional IRA would. If I set "Total of IRA Contributions Previously Taxed" to $0 then it actually increases this magical "Pension Income" to the full contribution/distribution amount. TurboTax is literally taxing me on unrealized gains hence why it's asking the value of my IRAs. If I set the current value of my IRAs to $0 all of this pension income goes away and the refund increases to the correct amount. 

[waespym]

"If TurboTax was asking about your Roth IRAs, all references to "IRA" should have been replaced with "Roth IRA'."

One page mentions the RothIRA distribution. The next says IRA. I have not filled out any forms for Traditional IRAs. On the second page it specifically says "this IRA" which is referring to the previous page discussing a RothIRA. 

[fanfare]

" If I set the current value of my IRAs to $0 all of this pension income goes away and the refund increases to the correct amount. "

It seems you have found the workaround you need, if it does not mess up your Federal tax return.

I have a similar issue with a Roth conversion (not TurboTax),

I am obliged to set the year end value of IRAs to zero to get the correct result, even though it is not a true statement. I don't think this setting goes through with the e-File dataset.

[STN802]

I had the same issue. Turbo Tax is trying to say that I owe a large amount of money for withdrawing contributions from my Roth IRA. Anyone can easily look up that these contributions were already taxed and can be withdrawn early at any time without tax or penalty. In addition, several options throughout that process were pretty poorly worded by Turbo Tax.

I ended up stopping my taxes with Turbo Tax this year and giving my business to H&R block instead.