11 Jan Wait! I’m priced out of the retiree tax break?

Q. My question is about the income tax break for retirees that came with the gas tax bill. I read that if you go over the $100,000 cap, you lose the total exclusion. You get nothing. Is that true? You would have to pay tax on the first $100,000?
— Taxed enough already

A. Yes, you would.

The New Jersey pension exclusion has been around for awhile, and the only change under the new law is the pension exclusion is being raised.

By 2020, a married couple filing jointly who are 62 or older can exclude up to $100,000 of retirement income, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

It’s important to understand what New Jersey considers retirement income.

Maye said taxable pensions, annuities and IRA withdrawals (2015 NJ 1040 line 19) are what count.

“To the extent there is an `unclaimed pension exclusion,’ the taxpayer may be able to exclude other types of income, such as wages, interest and dividends,” Maye said. “In order to use the `unclaimed pension exclusion,’ the total amount of your income from wages, net profits from business, distributive share of partnership income and net pro rata share of S corporation income cannot be more than $3,000, and you did not use the maximum Pension Exclusion.”

He offers this example. Say a 62-year-old couple in New Jersey has income of $90,000, including $5,000 of taxable pension income. They’d have an “unclaimed pension exclusion” of $15,000. For 2016, this would be the $20,000 pension exclusion minus the $5,000 pension income.

“Assuming their income from wages, net profits from business, distributive share of partnership income, and net pro rata share of S corporation income was less than $3,000, they ultimately would get the remaining $15,000 as `other retirement income exclusion,'” Maye said.

Specifically to your question, Maye said the new law did not change the income cap taxpayers need to meet to qualify for the pension exclusion.

The NJ rules state: “Provided your gross income for the entire year before subtracting any pension exclusion does not exceed $100,000.”

So, Maye said, the New Jersey pension exclusion rule is cliff-based at the $100,0000 level.

“You go $1 over and you no longer qualify for the pension exclusion,” Maye said.

Also remember when planning for the pension exclusion that Social Security is not considered income for New Jersey income tax purposes.

“It does not factor into the $100,000 income limit,” Maye said. “New Jersey taxpayers near the $100,000 income level need to plan accordingly to avoid losing out on the pension exclusion benefit.”

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This post was first published in January 2017.