NY resident with 1099-R pension income from NJ

[TNovs]

I'm a NY resident receiving pension income from the state of NJ (retired teacher).  I was a former resident of NJ and while working I contributed to the pension system and my contributions were taxed by NJ.  If I remained a resident of NJ the pension income would not be taxable until I recovered all of my contributions.  The NJ pension administrator withholds federal taxes but does not withhold taxes for states other than NJ.  The document I received with my 1099-R states that "your benefits may be taxable in your state of residence.  Please check with your home state's tax office to determine if your benefits are subject to tax."  I called the NY state tax office and they could not offer any advice for my situation.  My 1099R shows the same amount in box 1 gross distribution and box 2a taxable amount.  It shows the federal income tax that was withheld in box 4, it has $0 in box 5 (employee contributions), 7 in box 7 (normal distribution), and $0 in box 12 (state tax withheld).  The NJ state pension website displays the correct amount of after-tax contributions that I made to the pension system (which is more than my pension distribution in 2021).  My concern is if the full distribution amount is taxed by NY state then I will be double taxed on the portion that is a return of my after-tax contribution.  NY and NJ are reciprocal states when it comes to taxes and so I'm wondering how do I input this 1099R in TurboTax so that I avoid paying NY state taxes on a distribution of my after-tax contribution?

[GeorgeM777]

Just a point of clarification, NY and NJ are not reciprocal states for tax purposes.  NJ and PA are tax reciprocal states, but NY has no reciprocal tax agreements with any other state.  Despite there not being a tax reciprocal agreement between NY and NJ, NJ will not tax your pension as you are no longer a resident there.  

If you just started receiving a pension this year, there's a good chance that the amount in box 2a is the correct taxable amount given that the payer did not put a check mark in box 2b on your 1099-R.   However, if the amount in box 2a is the same as the amount in box 1, and that appears to be the case, and you know that you made contributions to your pension plan using after-tax dollars, which also appears to be the case, you may need to use an alternate method, such as the Simplified Method to determine the correct taxable amount of the distribution.

To begin the process of entering your 1099-R information, start at the Wages & Income section and scroll down to the section Retirement Plans and Social Security.  Select the option for 1099-R.  When you begin answering the questions in this section, at the bottom of the first page, you will see an option to manually enter your information.  Choose that option and continue through the application.   Eventually, you will come to a page where you will be asked to begin the process to determine the taxable portion of your pension.   Answer the questions accordingly. 

If you have already started entering your 1099-R information, you may have to go back to the beginning and delete the entry.  When you start the process anew, you will begin with the option to manually enter your information.  You need to manually enter your 1099-R in order to see all relevant screens, particularly those that relate to determining the taxable portion of your pension distribution.    

[TNovs]

Thanks for the response George!  I just have a couple follow up questions.  If I do what you propose in TurboTax will it help determine the taxable amount for my state vs federal return (I'm assuming the federal taxable amount remains what is shown on my 1099-R and is same as the gross distribution amount)?   NY State excludes the first $20,000 of 1099-R distributions per person per tax year.   When factoring in the amount of my aftertax contributions in the annual pension distributions can I allocate it such that I maximize the $20K exclusion provided by NYS?  Or do I need to assume the aftertax contributions are distributed first and depleted before any state taxable distributions are made?  It will take a few tax years to completely distribute all my aftertax contributions that I had made into the pension program.  Thanks again.

[GeorgeM777]

Yes, TurboTax will first calculate how much of your NJ pension is taxable on your federal return, and then it will calculate your tax liability, if any, on your NY return.  You want to begin with your federal return first because TurboTax will "pull" information from your federal return and use it to populate your NY return. 

According to the IRS, you must figure the tax-free part of your pension when the payments first begin. The tax-free amount remains the same each year, even if the amount of the payment changes.  In other words, because you funded your pension, in part, with after-tax dollars, you will need to determine how much of the distribution reflected on your 1099-R is taxable.  If there is a taxable part of your pension remaining on your federal return, then such amount will transfer to your NY return, and as you indicated, $20,000 is excluded from NY tax.