Why you may not get the retiree tax break

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Q. For the new pension exclusion, I understand it will be a few years before the excluded amounts reach $100,000. There’s also an income cut-off of $100,000. My question: If you have combined retirement income in excess of $100,000, do you lose the exclusion in part or totally? Why would they create an exclusion and make people ineligible? Or is the retirement income excluded before you figure out what your income level is?
— Retired taxpayer

A. Yours is a common question about the pension exclusion.

You’re correct that the amount of income you can exclude will reach $100,000 in 2020. For 2017, it’s $40,000, and it will go up by $20,000 every year until it reaches the max.

You’re also correct that once you reach $100,000 of income, you lose the benefit.

And you’ll lose it entirely because all of your income is included in the calculation, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

“If it was not, then assuming the full $100,000 exclusion, effectively someone with total income of $199,999 of income — consisting of $100,000 of retirement income and $99,999 of other taxable income — would be eligible for the exclusion,” Hook said.

But they’re not. Once you exceed $100,000 of income, you’re out.

In terms of why the exclusion was set to eliminate the tax break at that cut-off level? Hook said he presumes it’s because the break was meant to benefit lower-income taxpayers.

“There is no phase-out of the exclusion,” he said. “Once your income exceeds $100,000 the exclusion is completely lost.”

The good news? Social Security is non-taxable for New Jersey purposes, so it won’t count as part of the calculation.

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