Ask the Expert: How do I apply for a tax exemption for a 401(k) withdrawal?

I’ve withdrawn $20,000 from my 401(k) plan. How do I claim a tax exclusion for this on my tax return?

If you’re eligible for this tax exclusion, you claim it on your New York State income tax return, Form IT-201.

You’re referring to the New York Pension and Annuity Income Exclusion on up to $20,000 of annual income from retirement accounts, including IRAs and employer-sponsored accounts. The exclusion is available to every New Yorker over age 59½ . (A different law grants an unlimited New York tax exclusion on income from all government pensions and retirement plans.)

The Pension and Annuity Income Exclusion is an individual tax break. That means taxpayers can only claim it on distributions from their own retirement accounts. In other words, even if you’re married and filing a joint tax return, you can’t pass an unused part of your exclusion to your spouse. Let’s say Jack takes $25,000 from his IRA, and his wife Jill takes $15,000 from her 401(k) plan, for example. Together they can only exclude $35,000 of their combined income on their state tax return — $20,000 of his retirement income and $15,000 of her retirement income.

On Form IT-201, look for the section “Federal Income and Adjustments.” That’s where you list the income reported on your federal return, including “Taxable amount of IRA distributions.” Beneath it you’ll find “New York subtractions,” where you list amounts that are taxable on your federal return, but not taxed by New York. These include the taxable portion of your Social Security benefit, interest on U.S. savings bonds and the New York Pension and Annuity Income Exclusion on up to $20,000 of income from retirement accounts.

The bottom line

New Yorkers over age 59½ pay no state income tax on the first $20,000 of annual retirement income.

More information

tax.ny.gov/pdf/volunteer/ty2018/co-60.pdf

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