Does New Jersey Tax a Qualified Charitable Distribution?
A qualified charitable distribution can provide valuable federal tax benefits. But the state tax treatment of a qualified charitable distribution is not always the same.
In this (Part II), we explain why a qualified charitable distribution generally does not reduce taxable income for New Jersey residents. We also highlight how New York and Pennsylvania treat these IRA distributions differently.
We also bring up why understanding tax rules for your state is an important part of retirement planning. Before making a qualified charitable distribution directly from an IRA, it is important to understand both the federal AND state tax implications of these strategies / decisions.
Takeaways
- A qualified charitable distribution can reduce federal adjusted gross income when reported correctly.
- New Jersey does not provide a state income tax benefit for a qualified charitable distribution.
- New York’s tax calculation begins with federal adjusted gross income, creating a different outcome.
- Pennsylvania generally does not tax any retirement distributions for residents over age 60.
Does New Jersey Tax a Qualified Charitable Distribution – Links
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Does New Jersey Tax a Qualified Charitable Distribution – Transcript
A question came up in a comment on the previous video on qualified charitable distributions.
We’ll link to that original video, uh, here.
The question was, “What happens at the state level with a QCD, with a qualified charitable distribution? Do we get the same deduction on the state level that we do on the federal level?”
The answer – for New Jersey – is no.
But the answer is not a “universal” no for all.
It doesn’t work that way for all states.
As usual, things are a little nuanced.
So New Jersey residents should understand that the state really doesn’t offer any kind of benefit.
When you take your distribution from your IRA, you get a 1099-R.
The full amount of your distribution is going to be reported.
It’s on your federal tax return, on line four, where you show a qualified charitable distribution.
And you get that amount knocked off your adjusted gross income.
Remember, when you get to the bottom of page one of your federal tax return, your 1040, that shows your adjusted gross income.
That’s what you’re going to be taxed on.
So the money that gets given to a charity that comes from your IRA, a qualified charitable distribution, that comes off before you get to the line for your adjusted gross income.
Interestingly, the state of New York starts their calculations for state tax income in New York, they start with your federal adjusted gross income.
So, not that you DO get a deduction, there’s no deduction for it, but that income gets excluded when…
…if you’re a New York resident filing New York taxes.
In New Jersey, tough luck.
It’s just the way it is.
They start with the full distribution from your IRA, from your 1099-R.
What about other states?
Well, nearby, in Pennsylvania, you don’t get a reduction in income in Pennsylvania with a qualified charitable distribution.
But that point is moot because Pennsylvania doesn’t tax ANY retirement distribution.
So whether the money goes to a charity — or stays in your pocket, it doesn’t matter.
The qualified charitable distribution isn’t going to be taxable in Pennsylvania for your state taxes.
So the IRA distribution, in Pennsylvania, whether it goes to a charity or not, is just not taxable for folks over the age of 60 years old.
And then you’ve also got states, where there is no state income tax —
Florida, Texas, Nevada.
Delaware has no state income tax.
So the question about “can you get a reduction in your taxable income” with — on a state level with a QCD, qualified charitable distribution, really not relevant – in states where there is no state income tax.
I think the broader benefit is, there’s certainly a benefit — in the sense that with your federal taxes, if you’re taking a large distribution from your IRA, you may be taxed at, in the 22% or 24% marginal tax bracket.
Versus say, in New Jersey, 5%, maybe 6% ?? income tax.
You do get a big benefit, with the qualified charitable distribution.
It just doesn’t flow through, unfortunately, at the state level.
I think the problem, though, is a lot of people whiff on this, or they…
…..it just doesn’t get mentioned, in a lot of financial planning literature that we’ve seen — and in speaking with other advisors……
…it’s a little bit like “taking the lampshade off the guy at the party.”
When you talk about qualified charitable distributions, the benefit is certainly on the federal level.
But a lot of folks just don’t even KNOW there is a completely different set of rules when it comes to state income taxes.
And for us here in New Jersey, we’re not going to get a deduction – or a reduction in taxable income – at all.
