28 Aug Will we lose the retiree tax break?

Q. Both my wife and I own a home in New Jersey and are quasi-government employees. Her pension is New Jersey and mine is New York. We are planning to move to Puerto Rico, where my wife owns a home, for retirement, and we plan to claim our residency there. Do we qualify for the tax break?
— Adios New Jersey!

A. Congrats on your retirement plans, but we’ve got some bad news for you.

You would not be able to use the New Jersey pension exclusion tax break as Puerto Rico residents, said Michael Ciccone, a certified financial planner with Tradition Capital Management in Summit.

“That law was passed in 2016 with the intent to help stem the exodus of retirees from New Jersey to states with more retiree-friendly tax codes,” Ciccone said. “The pension exclusion tax break is only available to New Jersey residents – these readers specify that they plan to become residents of Puerto Rico.”

But, Ciccone said, not all is lost.

Pension, annuity and IRA income received by a nonresident is not subject to New Jersey income tax.

It’s important to note that because you will have homes in both New Jersey and Puerto Rico, you need to pay attention to residency and domicile rules.

“To be considered a resident of Puerto Rico, one needs to spend at least 183 days out of the year there – among other requirements,” Ciccone said. “U.S. Citizen residents of Puerto Rico generally need to file both U.S. and Puerto Rico tax returns – the U.S. tax return would include income from worldwide sources but exclude `Puerto Rico source income.'”

Then, while the Puerto Rico tax return would also report income from worldwide sources, if you report “U.S. source income” on your Puerto Rican tax return, you can claim a credit against your Puerto Rico tax, up to the amount allowable, for income taxes paid to the United States, Ciccone said.

He said Puerto Rico has its own separate tax code from the United States and you should discuss that with an accountant who is familiar with Puerto Rico’s tax code and has experience working with retiree transplants to the island.

Even though these readers don’t qualify for the New Jersey retirement income tax break, let’s go through the basics for the rest of you.

Ciccone offered what he called the three most important factors to remember:

1. When fully phased in, the law will allow New Jersey residents filing a joint tax return to exclude up to $100,000 of retirement income from taxation. But there are cliffs, Ciccone said, meaning that if you are over $100,000 of New Jersey gross income, even by a single dollar, you lose the exclusion fully.

2. It is important to understand how the various categories of income are defined and what they include. For instance, the $100,000 gross income limit does not include Social Security, which is not considered income for New Jersey income tax purposes. The New Jersey retirement income definition includes pensions, annuities and certain IRA withdrawals, he said.

3. The tax break is still being phased in. It is capped at $40,000 for 2017 for joint filers and increases by $20,000 each year until it reaches $100,000 in 2020.

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This post was originally published in August 2017.