07 Feb Will NJ’s retiree tax break help me?

Q. I have a pension from the state at $65,000 a year. My other retirement income is from Social Security. Can the new retiree income tax savings count for me?
— Looking for savings

A. You’re on the ball. These issues are often complicated, and you don’t want to get a nasty tax surprise.

Let’s start with Social Security benefits, which are already tax free for New Jersey purposes, said Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna.

The tax benefit you’re talking about was signed into law as part of the bill that raised the state’s gas tax and put the state’s estate tax on the road to its own death.

Meckler said one of the benefits of the new bill was to increase the amount of retirement income before taxes are applied.

Right now, married couples filing jointly can get out of paying any state income tax for their first $20,000 in retirement income. With the new bill, that amount will jump to $100,000 by 2020, Meckler said.

“The limit for a married couple filing jointly will jump from $20,000 to $40,000 in 2017, to $60,000 in 2018, to $80,000 in 2019 and $100,000 in 2020,” he said. “For a married person filing separately, it will gradually increase from $10,000 to $50,000, and for an individual filing as a single taxpayer, from $15,000 to $75,000.”

Anyone with more than $100,000 in taxable New Jersey income would have to pay the full state income tax, Meckler said, noting that the tax break applies to residents 62 and older.

There’s more for you to know because you’re also receiving a pension from the state.

“As an employee, you were not required to pay into or make contributions to your retirement plan while you were working,” he said. “It is a `noncontributory’ plan, and all the amounts you receive from that plan are fully taxable.”

But if you did make contributions to your retirement plan, it is a “contributory” plan. Meckler said. For New Jersey income tax purposes, you will use either the Three-Year Rule Method or the General Rule Method to determine the taxable and excludable parts of any distribution from a contributory plan other than an IRA.

“When using the Three-Year Rule Method, your pension is not reported as taxable income until the payments you receive from the plan equal the amount you contributed,” Meckler said. “Once you have received an amount equal to your contributions, all payments from the pension plan are fully taxable.”

Under the General Rule Method, in the first year, and every year after, part of your pension or annuity payment is taxable, and part can be excluded from your gross income, Meckler said.

Be sure to consult with a tax professional who knows your specific circumstances before you make any decisions.

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This post was first published in February 2017.