The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

[Giraldo07]

Hello,

So I took a distribution out of my 401K due to reduced pay at work. I entered the total amount on my 1099-R on my federal return and answered the additional questions to pay taxes only on 1/3 of the total amount without the 10% penalty due to the cares act. 

Now when doing my state return (New Jersey) the complete amount shows there and I guess I am being taxed on the complete amount. Do I need to change this to only 1/3 of the total amount of my distribution as the software did on my federal return? Or does the state not offer the three year period to pay the taxes on the total amount? (New Jersey)

[DavidD66]

New Jersey does not recognize the three year period to pay tax on retirement plan distributions.  The CARES Act amended IRC section 72 which includes the early withdrawal penalty and when to report retirement plan distributions.  New Jersey does not follow IRC section 72 and did not adopt the CARES Act amendment.  

[Giraldo07]

So this means that for my state return I will have to go with the complete amount instead of 1/3 from my federal since "New Jersey does not follow IRC section 72 and did not adopt the CARES Act amendment. "  ?

[ThomasM125 · Accepted solution]

@Giraldo07 You are correct, states establish their own rules on how to tax income and just because you can exclude a portion of your pension distribution on your federal return, that does not apply to your New Jersey return. 

[MJLAW]

I don't believe this is correct.  Please see this from the Pro Forum.  I believe there is a bug here.

https://proconnect.intuit.com/community/proseries-tax-discussions/discussion/re-covid-19-cares-act-i...

[AmyC]

You are in NJ. NJ taxes retirement contributions when made. Only the earnings in the distribution are taxable to NJ, not the full amount.  

You have already paid taxes on most of the money if you were a NJ resident when you earned the income.

See Instructions for the 2020 NJ-1040 - NJ.gov 

Follow these steps:

NJ taxed the money when you earned it so it is not taxable now.

1. You enter the 1099-R in federal.

2. You select that it was earned in NJ.

3. Where is this Distribution From? Select General Rule because:

If you made contributions to your retirement plan, it is a "contributory" plan. For New Jersey income tax purposes, you will use either the Three-Year Rule Method or the General Rule Method to determine the taxable part of any distribution you receive from a contributory plan other than an IRA. If you won't get all the money back within 3 years, choose general rule.

4. fill in the boxes under General Rule*, continue

5. Select From a Qualified Plan

6. Continue through the program answering questions

When you go to the state section, you will see Retirement Exclusion Summary. It will say certain retirement income on federal is NOT taxable by NJ. 

*For General Rule Method. 

1. Enter your basis, everything you contributed to the plan.
2. Enter return on contract - this distribution plus any prior distributions from this plan.

[Giraldo07]

Hi AmyC,

Could you please provide a bit more detail on this section:

*For General Rule Method. 

1. Enter your basis, everything you contributed to the plan.
2. Enter return on contract - this distribution plus any prior distributions from this plan.

Let's say for example  I took out 10,000 as a covid related distribution from my 401k and paying only 1/3 taxes on the federal section what would be my values entered there on the NJ section?

[fanfare]

The general rule and three year rule as described above do not apply to 401ks and IRAs.

If you were affected by COVID you can split the tax on Form 1040 but NJ does not allow that.

NJ doesn't have a 10% penalty for early withdrawal in any case.