Q. My employer provides a health insurance plan of which I pay a portion through weekly payroll deduction. At the end of the year, my W-2 shows a reduction in my federal taxable income but not my state income. I take it, therefore, I am not able to deduct my premium from my taxable income to get to the $100,000 for the pension exclusion for Married Filing Jointly. Am I correct?
– Healthy, not wealthy
A. Your employer has arranged for your medical insurance contribution to be made through what is called a Section 125 plan or cafeteria plan.
This plan allows for employees to have their medical insurance costs deducted from their paycheck before federal income taxes or Social Security taxes are calculated, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.
“This is a great benefit to employees as it results in a significant tax savings, on average 25 to 35 percent,” Gallo said. “However, the State of New Jersey does not recognize these plans since primarily, it is a state that taxes it’s residents on gross income.”
That’s why your W-2 reflects a higher state income than what’s shown as federal taxable income.
As for the calculation of New Jersey income with regard to the pension exclusion limits, the law clearly states that you must calculate your gross income from all sources other than Social Security, New Jersey tax-free bonds and interest received on any federal obligations such as U.S. Savings Bonds or Treasury Notes, Gallo said.
“Therefore, you are correct in saying that you are not able to deduct your annual medical premiums when calculating your gross income for pension exclusion purposes,” he said.
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