Legislation Assemblyman Wayne P. DeAngelo sponsored to help certain taxpayers better understand taxation as it relates to their retirement plans was advanced by an Assembly panel on Tuesday.
The bill (A-1513) would direct the Division of Taxation to produce instructional materials on the appropriate gross income tax treatment of 457 deferred compensation plans.
“Most people who are eligible for a 457 plan want to be responsible about preparing for their future, but without an expert-level background in how tax laws work, the process simply can be nearly impossible to comprehend,” said DeAngelo (D-Mercer/Middlesex). “This legislation will help clarify tax return instructions so that individuals can have a better handle on their retirement accounts.”
Under current law, state governments, local governments and certain tax-exempt organizations may establish deferred compensation plans for employees. For federal income tax purposes, the contributions and earnings on those plans defer taxation until distribution. New Jersey does not track the federal deferral on contributions, but it does exclude the portion of plan proceeds representing previously taxed contributions upon distribution from taxation. The excludable portion of a distribution can vary depending on the composition of contributions to the plan. Though New Jersey’s current gross income tax return instructions address these issues, that guidance is not explicitly detailed to 457 plans.
To make the process of claiming the exclusion less onerous for taxpayers, this bill directs the Division of Taxation to include specific instructions in the gross income tax return instructional materials that address the appropriate treatment of 457 plan contributions and distributions.
The measure was advanced by the Assembly Budget Committee.