22 May Why you may not get the retiree tax break

Q.  will turn 64 in June 2017 and I retired eight years ago with a pension of $73,000 a year. My wife just turned 60 and is currently employed with a salary of $165,000 a year. How does the new retiree pension exclusion affect us? Our tax status is “married filing jointly.”
— Planning ahead

A. The legislation passed last fall will increase the pension exclusion five-fold over the next four years.

Unfortunately for you, it won’t impact you based on your income situation.

While you meet the age requirement — attainment of age 62 by the end of the calendar year — you exceed the income threshold for claiming a pension exclusion, which remains unchanged at $100,000, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

“Any taxpayer reporting gross income in excess of $100,000 is precluded from claiming a pension exclusion,” he said. “Your pension plus your wife’s salary total $238,000, well in excess of the $100,000 income threshold.”

Becourtney said even if your wife was to retire, reportable income beyond your $73,000 annual pension, including any retirement income received by your wife plus investment income from interest, dividends and capital gains could not exceed $27,000 in total in order for you to claim a pension exclusion.

Other items that are expressly nontaxable and thus not reportable would include interest from New Jersey municipal bonds and unemployment compensation benefits, he said.

And Social Security benefits are never taxed by New Jersey.

Becourtney said as the pension exclusion climbs to $40,000 for 2017, $60,000 for 2018, $80,000 for 2019 and $100,000 for 2020 and after for joint filers, the number of taxpayers who will be able to claim the maximum pension exclusion will be fewer each year. That’s because the taxpayer will have less room for non-retirement distribution income in order to avoid exceeding $100,000 of total income, he said.

Note that for single filers, the exclusion amounts are 75 percent of the amount for those filing jointly.

Becourtney said for 2020 and future years, a joint filer will only be able to claim the $100,000 pension exclusion if they receive precisely $100,000 of retirement distribution income and have no other income.

“To maximize the pension exclusion, a taxpayer needs to monitor their overall income and not exceed $100,000,” he said. “Once an individual attains age 70 1/2, they are generally subject to the Required Minimum Distribution (RMD) rules under federal law, which would make things more difficult as far as having total income not exceed $100,000 where sizable retirement plan balances have accumulated.”

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This story was first published in May 2017.