21 Aug Do I qualify for the retiree tax break?

Q. I have a question about the new retiree tax break. If my salary is $110,000 and I make a $15,000 contribution to my 401(k), will I stay below the $100,000 income cap for the tax break?
— Senior citizen

A. Let’s first define the retiree tax break you’re talking about.

This is an exclusion of taxable retirement income on your New Jersey return. The 2016 level is $15,000 for single taxpayers age 62 or older and $20,000 for married taxpayer’s age 62 and older and it’s $40,000 for marrieds and $30,000 for singles in 2017.

The exclusion amount is scheduled to increase to up to $100,000 over the next four years.

So let’s look at what kind of income is considered for the exclusion.

New Jersey allows a deduction from gross income for 401(k) salary reductions, so if your gross income was $110,000 and you contributed to a 401(k) plan at work, your gross taxable income for New Jersey purposes would be $95,000, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

That’s the amount you’d put on your Form NJ-1040.

“However, the gross distribution from the pension or annuity is factored into the calculation of whether you are above the $100,000 in determining if it is indeed fully taxable,” Hook said.

Let’s continue your example.

Hook said if in addition to the gross income of $110,000 and 401(k) reduction of $15,000, you also received a $7,000 per year pension, you would not be eligible for the pension exclusion because your gross income, before subtracting the pension exclusion, exceeded $100,000.

There are some other items to be aware of for the pension exclusion.

“Not all retirement plan contributions are deductible from wages when computing New Jersey gross income,” Hook said. “IRA contributions, SEP contributions and 403(b) contributions are not deductible when calculating New Jersey gross income even though they are deductible for federal tax purposes.”

In these cases, your New Jersey gross income will be greater than for federal purposes, Hook said.

There are other planning techniques you can use to lower your taxable income for federal tax purposes, but they won’t work for the state.

“For example, capital losses in excess of capital gains can be deducted up to $3,000 against ordinary income for federal purposes but not for New Jersey gross income tax purposes,” Hook said.

Also, employee paid health insurance benefits generally are not allowed to be deducted against New Jersey gross income wages, which is different than for federal purposes, Hook said. Again, this results in taxable wages that are higher for New Jersey than for federal purposes.

To make sure you qualify for the pension exclusion, you’ll have to plan ahead. Speak to your tax preparer to determine exactly how your income will be treated so you don’t lose out on the tax break.

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This post was originally published in August 2017.