NJ taxation TSP invested in G fund

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bsteiner
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NJ taxation TSP invested in G fund

Post by bsteiner »

Even though it’s similar to a 401(k) plan, New Jersey doesn’t allow a deduction for contributions to the Federal Thrift Savings Plan because it’s not under Section 401. However, like a traditional IRA, the nondeductible contributions create “basis” for New Jersey.

New Jersey exempts IRA distributions attributable to interest on Federal and New Jersey obligations, including through a qualified investment fund (a mutual fund at least 80% invested in such obligations).

Is there a similar exemption for distributions from a Thrift Savings Plan invested entirely in the G Fund?
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nps
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Re: NJ taxation TSP invested in G fund

Post by nps »

NJ only exempts from tax those obligations which are statutorily free from state or local taxation under state or US law.

Regardless of how invested, distributions from the TSP are considered under US law to be income from a qualified plan. Therefore they no longer retain any tax-advantaged identity such as interest on US obligations.
HootingSloth
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Re: NJ taxation TSP invested in G fund

Post by HootingSloth »

Can one make an argument that this must be exempt under 31 U.S.C. Section 3124 or Weston v. Charleston and its progeny? Maybe a stretch but would be an interesting question.
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nps
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Re: NJ taxation TSP invested in G fund

Post by nps »

HootingSloth wrote: Sun Aug 21, 2022 6:53 am Can one make an argument that this must be exempt under 31 U.S.C. Section 3124 or Weston v. Charleston and its progeny? Maybe a stretch but would be an interesting question.
Maybe, but I don't think that's the issue at hand. It's not whether interest on US government obligations can be taxed by the states (it can't), but whether TSP distributions deriving from investments in the G fund are considered to be interest on US government obligations.
Nuestroro
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Re: NJ taxation TSP invested in G fund

Post by Nuestroro »

Technically, what you have is a subaccount of the Thrift Savings Fund. There’s an account at Treasury called the Thrift Savings Fund where Treasury holds in trust for your benefit amounts due to you (contributions, agency match, investment gains/losses). 5 USC 8437.

The Fund’s tax status is addressed in 5 usc 8440. Statute says to treat the Fund as a 401(a) trust for purposes of the federal internal revenue code. Doesn’t say anything about how state tax laws apply to it.

It looks like what you own is a direct obligation of the Treasury to return funds equal to contributions plus earnings minus losses. But no doubt I’m missing something. Or lots of things.
HootingSloth
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Re: NJ taxation TSP invested in G fund

Post by HootingSloth »

nps wrote: Sun Aug 21, 2022 8:11 am
HootingSloth wrote: Sun Aug 21, 2022 6:53 am Can one make an argument that this must be exempt under 31 U.S.C. Section 3124 or Weston v. Charleston and its progeny? Maybe a stretch but would be an interesting question.
Maybe, but I don't think that's the issue at hand. It's not whether interest on US government obligations can be taxed by the states (it can't), but whether TSP distributions deriving from investments in the G fund are considered to be interest on US government obligations.
I don't think that way of framing things is quite right, but I admit it's not something I've researched. The question, it seems to me, is whether NJ's income tax as applied to these facts, is a "form of taxation that would require [an] obligation [of the United States Government], the interest on the obligation, or both, to be considered in computing a tax." Obviously, what you have written above is an important part of that question, but arguably the scope is somewhat broader and seems to invite, to a degree, a substance over form type argument. Perhaps, then, this is one of the rare occurrences where a taxpayer, rather than the government, might be able to use a substance over form argument affirmatively. In other words, if a client came to me with this question, and the dollars were enough to make it worth it for them, I would do a fair bit of digging first to see if I could get to a return position for them.
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Nuestroro
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Re: NJ taxation TSP invested in G fund

Post by Nuestroro »

N.J.S.A. 54A:6-14 says gross income excludes interest from “those obligations which are statutorily free from State or local taxation under any other act of this State or under the laws of the United States.” Given that the TSP and its funds are obligations of the United States, I’d argue this exclusion applies. But consult your tax pro.
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nps
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Re: NJ taxation TSP invested in G fund

Post by nps »

Nuestroro wrote: Sun Aug 21, 2022 9:08 am The Fund’s tax status is addressed in 5 usc 8440. Statute says to treat the Fund as a 401(a) trust for purposes of the federal internal revenue code. Doesn’t say anything about how state tax laws apply to it.
That's correct. So under federal law, distributions are considered to be annuities. Those are not obligations of the US government and so US statute would not preclude NJ from taxing them.
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