16 Nov Jumping off the pension exclusion cliff

Q. Do you still not get the retiree tax break even if all your income is retirement income? That would result in a person with $100,000 of retirement income not paying any taxes since all his income is excluded and a person with $100,001 of all retirement income being ineligible. Is that correct?
— Taxpayer

A. It doesn’t matter what type of income when you add it all up to see whether or not you qualify for the exclusion.

And you’re right – there is a cliff. It’s all or nothing based on whether you qualify.

The $100,000 income threshold that is used to determine if a New Jersey taxpayer is eligible for the pension exclusion includes all taxable income, including retirement income, before subtracting any pension exclusion, said Megan Newby, a certified public accountant with Wilkin & Guttenplan in East Brunswick.

“In 2020, when the pension exclusion amount will be $100,000 for eligible taxpayers filing a joint return, a New Jersey taxpayer with $100,000 of New Jersey sourced taxable income completely from retirement sources will have no New Jersey tax liability,” she said.

Conversely, in 2020, a New Jersey taxpayer with $100,001 of New Jersey sourced taxable income completely from retirement sources will not be eligible for the pension exclusion, and therefore subject to tax on the full amount of their income, Newby said.

“It is important to note that the maximum pension exclusion of $100,000 will not be fully phased in until 2020,” Newby said.

For 2017, it’s $40,000, and it goes up $20,000 a year until 2020.

Also note that Social Security benefits are not taxable for New Jersey purposes, so they wouldn’t count toward income for the pension exclusion.

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The post was originally published in November 2017.