My NJ Pension payments should by excluded from my state income tax return for the first two years of retirement How do I exclude this from my NJ state return?

[inksulliv]

While the pension is taxable on federal, I have three years to recoup the money I contributed to the pension which was already taxed by NJ.

[ChristinaS · Accepted solution]

If you are a NJ resident, the initial 3 year rule screen is in Turbo Tax within the federal section, just a few screens after inputting the 1099-R itself.

The screen is titled "Where is This Distribution From". Input the distribution amount (Box 1) of the 1099-R into the New Jersey Distribution amount and check the 3 year box. The ensuing screens will address the taxation on the federal level, via the Simplified Method.

You only recover your own contributions tax-free. In the NJ interview, you may be asked to confirm your total cost in the plan (Box 9a) and the amount recovered tax-free for NJ in prior years. If this is your first year, you will indicate 0. As long as your distribution in Box 1 is less than 9b, NJ won't tax you.

The Three-Year Rule screen for NJ is towards the very beginning of the state interview. Please ensure that you review the screens in both federal and NJ areas so the information properly computes. 

Three-year rule: You may use this method if you will recover all of your contributions to the plan within 36 months from the date you receive your first payment from the plan, and both you and your employer contributed to the plan. Benefits based on your contributions are not taxable in New Jersey, but benefits based on your employer's contributions are fully taxable.

[brinkbetty]

 After filing using the 3 year rule what do you do in the fourth year?