What income counts for retiree tax break?

Ask NJMoneyHelp

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Q. Can you confirm which kinds of income is counted for the new retiree tax cut? I believe it’s all pensions, IRA distributions, savings interest, investment dividends and gains (minus losses, if any).
— Working it out

A. The new tax cut for retirees, which allows for an exclusion of pension income of $40,000 for married couples in 2017, has a cliff. If you have more than $100,000 of income total — not counting Social Security — you won’t qualify.

The exclusion number will go up $20,000 a year until it reaches $100,000 in 2020.

Most of your assumptions are correct, but we want to clarify what happens to your IRA distributions.

IRA contributions — including SIMPLE and SEP IRAs — are not deductible for New Jersey in the year you made the contribution, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

“So when those funds are withdrawn, your original contributions are not subject to New Jersey income tax,” Lynch said. “The main problem is nobody keeps track of that, so generally, most people end up paying the tax on IRAs twice.”

Let’s hope you kept good records over time. Consider working with an accountant to strategize to make sure you will qualify for the exemption.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.