Inherited IRA - RMD - New Jersey Return

[rpedinoff]

Hello,

My wife inherited a non-spousal traditional IRA from her mother who passed in 2018, prior to her mother being old enough to take RMD's.  The first year of withdrawal was 2019 and the good news is everything was filed properly so my wife can take RMD's over her remaining estimated lifetime.  The bad news is depending on the answer I may need to amend NJ 2019.

For New Jersey, traditional IRA's do not allow a deduction on contribution.  Accordingly, when you withdraw you only pay on the gains, not the contributed amount.  Otherwise you're paying tax twice (in this case, once by her mom on contribution and a second time by my wife on withdrawal).  So if the value of the IRA is for example say $100,000 and the contributed amount was $20,000, you would only pay tax to NJ on 80% of the RMD.  (I think I got that right).

So after my long winded opening, here's the question... for a New Jersey state return, do you:

1) pay tax on the full amount of the withdrawal (I don't think its this - and this is what I did on my '19 return which may require amendment)

2) pay no tax on withdrawal, similar to if you inherited stocks and you get a step up in basis

3) continue to pay tax based on contributed % - as per the example above, 80% of the RMD would be taxable to NJ

If it is #3, this amount was rolled over by her mother at some point into this account, so I have no idea what the contributed basis would have been and I doubt there's a way to reasonably find it.  Should I just take an educated guess in this case?  Say 35% or so was contributed?

ADDED AFTER ORIGINAL POSTING:  Doing additional internet searches, it seems that #3 is the answer.  Which then brings me back to how you determine contributed basis when you don't have the information?  Do you just be conservative and take 10%?

Appreciate any thoughts.  Thank you.

[ErnieS0]

The short answer to your question is that there is no safe harbor amount. If you were audited, it would not make any difference if you chose 10% or 90% if you simply picked a number out of thin air.

Do you have any records? Either old tax returns or account statements. Even if you had a few, you could come up with an estimate. For example, if your wife's mother always contributed the maximum amount, you could extrapolate.

NJ may not accept that on audit, but at least you have a foundation for your number if you want to go that way.

The maximum amount allowed as an IRA contribution was $1,500 from 1975 to 1981, $2,000 from 1982 to 2001, $3,000 from 2002 to 2004, $4,000 from 2005 to 2007, $5,000 from 2008 to 2012, $5,500 from 2013 to 2018, and $6,000 from 2019 to 2021. Beginning in 2002, those over 50 years old could make an additional contribution of up to $1,000 called a "catch-up contribution."

The safest position is that if would all be taxable, but that would be incorrect.

You did pay tax on 100% of the distribution in 2019 so if you filed an amended return and it was rejected, there would be no additional tax or penalty. So if you want to amend with some basis, you can see what happens with no consequence. If NJ accepts your 2019 amend, there's no 100% guarantee it will accept the IRA basis going forward, but it's a good sign.

[fanfare]

@rpedinoff 

You have a basis in your IRA as far as NJ is concerned because you did not deduct IRA contributions from your NJ taxable income in all those past years.

Those are unrecovered.

The same applies to Inherited IRAs, except you must do the calculation separately based on the decedent's NJ contributions.

See Worksheet C in the NJ Resident Return Instructions for how to avoid double taxation on that money (i.e. recover it) when you withdraw from your IRA. There is a first year calculation, and then a calculation for all subsequent years. OR use TurboTax to do it, it is the same thing but in a different presentation.

You will need good records showing what you put in over the years, or some way to reconstruct that information.

However, if the Retirement Income Exclusion eliminates your tax, the unrecovered calculation becomes moot.
You qualify for the pension exclusion if:

• You (and/or your spouse/civil union partner, if filing jointly) were 62 or older or disabled as defined by Social Security guidelines on the last day of the tax year (December 31 for calendar year filers); and
• Your total income for the entire year was $100,000 or less.

You don't have to amend 2019.

You can start recovering contributions in tax year 2020 or 2021. It will work out about the same in the end.

[rpedinoff]

Thank you for your feedback.  Since I'm a CPA myself (not taxes) I'm going to go the conservative route and i'll just pay the tax.  We are in our early 40's so we'll pick up the benefit of the exclusion in 20 years or so.