As we noted in our September 2006 Tax and Trusts & Estates UPDATE, the recently enacted federal pension legislation included a noteworthy change: the ability of taxpayers to exclude up to $100,000 per year from their income when they make a "qualified charitable distribution" from their IRA or Roth IRA. To qualify for the exclusion from your federal income tax, you must have attained age 70½ on the date of the distribution, and the distribution must occur in tax years 2006 and/or 2007 and be directly transferred to a public charity (or certain private foundations that make immediate distributions of the contribution). The distribution also applies toward satisfying the annual minimum distribution requirement for the IRA participant.
Our September 2006 UPDATE suggested that this exclusion should apply also for New Jersey Gross Income Tax purposes, since New Jersey has historically tracked certain of the federal income tax rules governing IRAs (e.g., the rollover rules). However, the New Jersey Division of Taxation announced on November 2, 2006, that the treatment of IRA distributions would not change for New Jersey Gross Income Tax purposes despite the change in federal law, and that no similar legislation has been proposed for New Jersey income tax purposes. Therefore, any distribution from an IRA otherwise considered income for New Jersey Gross Income Tax purposes will continue (at least at this point) to be taxed as pension and annuity income on your New Jersey Income Tax Return (Form NJ-1040), even if those funds constitute a "qualified charitable distribution" for federal income tax purposes.
