Taxable portion of an IRA to Roth IRA in NJ

[jrc0109]

NJ Div of Taxation brochure GIT-1&2 states

IRA Contributions, Rollovers
If you qualify to convert an existing IRA to a Roth IRA for federal tax purposes, you also qualify for New Jersey
tax purposes, even if your New Jersey taxable income is more than the federal limitations. You can withdraw all or part of the assets from a traditional IRA and reinvest them in a Roth IRA. In most cases, your contributions to a traditional IRA were previously taxed. Only the earnings are taxable to New Jersey in the year you roll over the funds.

So, IRA contributions were made annually while I worked and the IRA account grew over those years, does that mean only the earnings above the contributions are taxable when funds are transferred from an IRA to a Roth IRA?

Example: IRA contributions from 1990 to 2000: $20,000. Grew to $50,000 in 2021. If $20,000 is rolled over into a Roth IRA, would that mean no taxes are due on the $20K rollover? Then when the $30k is rolled over, it would be fully taxable in future conversions?

Thank you.

[MaryK4]

You are correct that your initial $20,000 can be rolled over with no taxes owed because it represents contributions that were previously  taxes by New Jersey.  TurboTax will create the Worksheets because you do have to keep track of the amounts that were taxed.  After all the tax free contributions are taken out, you will pay New Jersey tax on the distributions that represent the earnings.   See GIT-2 -IRA Withdrawals for more information.

[fanfare]

NJ has its own formula to exclude the basis in a conversion. It doesn't conform to Federal Form 8606.

By my reading,

in your example your $20,0000 should appear on NJ-1040 Line 20b and only there.

I don't know whether TurboTax handles your situation correctly or not.

Note: It looks to me NJ worksheet C is not designed to handle this situation.

[fanfare]

@jrc0109 

what is the Distribution Code on your 1099-R ?

[jrc0109]

The distribution Code is 7.

[jrc0109]

Thank you. My IRA contributions go back many years. I do not think I was using TurboTax back then.  I saved all my tax returns. Could I go back and add up the contributions and then deduct them from the total I rolled over in 2021 from my IRA into my Roth?

[fanfare]

I thought we already determined that your contributions of 20,000 are to be excluded.

Or did you just make that number up?

That's not helpful.

The taxable amount goes on Line 20a.

If you do it manually with overrides, you'll have to file a paper tax return.

OR

File at  https://www.njportal.com/Taxation/NJ1040/

you must know all the amounts for all lines. there is no calculation there.

This is useful if you want to avoid the $40 Turbotax state e-File fee.

[jrc0109]

I did not mean to mislead you. The $20,000 was just an example.

Sorry.

jrc0109

[fanfare]

I don't have TurboTax 2021 so I can't try this scenario.

Maybe somebody else knows how to do it with TurboTax not using overrides.

[ErnieS0]

If you convert a Traditional IRA to a Roth IRA, TurboTax New Jersey allows you to enter your previously taxed contributions.

[fanfare]

As the Emperor said,

Well, there it is, then.

[JerseyBird68]

@ErnieS0 @MaryK4 what about my case below:

Over the years, I have contributed to non-deductible IRA for $100,000 (this is all after tax money), now it grew to $200,000.

in 2021, I, first time, converted $80,000 to Roth IRA,

so in the NJ previous taxed amount line, shall I put $80,000 or $100,000?

In either case, my converted amount ($80k) is less than my basis ($100K), so I should have 0 tax liability, right?

This is different from the Federal tax calculation.  In Form 8606, the taxable amt is

$80k (IRA distribution/converted to Roth) x  ($100k after tax basis/ $200k current value) = $40K

I certainly like the NJ way of calculating, but since it's different from federal calculation, I want to make sure I am doing it correct!

Thanks!

[fanfare]

@JerseyBird68 

You converted $80,000 so that is the amount entered.

That leaves you with $20,000 basis for future "recoveries" or conversion.

As you pointed out, your NJ basis is not the same as your Form 8606 prior years basis.

[fanfare]

@JerseyBird68 

You might want to allocate less basis if that 80,000 is used up to no avail this year.

I'm still trying to decide if that is cheating or not.

[JerseyBird68]

@fanfare I see you point.  

My case is, I sold my losing stocks.  Say, 

I purchased Stocks A for $5000, when I converted, it was $3000. So I have no tax gains, so no tax.

But even I still have $2000 allowance left, can I use/claim that allowance next year? 

Isn't that security specific, when NJ asked you the basis?