What income counts for the pension exclusion?

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Q. When talking about the pension exclusion, what counts as pension income? It’s not just a traditional pension, right?
— Trying to save taxes

A. You’re correct. When you hear about pension income as it pertains to the new retiree tax break, called the pension exclusion, we’re talking about more than a traditional pension.

It includes a whole bunch of different kinds of distributions from retirement vehicles, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

It includes:

• Individual Retirement Arrangements (IRAs)
• Keogh Plans
• Simplified Employee Pensions (SEPs)
• Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plans
• Profit Sharing Plans
• Defined Benefit Plans
• 401(k) Plans
• 403(b) Plans
• Section 457 plans
• Employee pension if not included above

Becourtney said the one exception is military pensions.

“If an individual is receiving a pension resulting from service in the Army, Navy, Air Force, Marine Corps or Coast Guard, normally paid by the U.S. Defense Finance and Accounting Service, that income is never reportable in the first place regardless of age or total income,” he said. “This also applies to survivor’s benefits payments related to spousal military service.”

But, he said, civil service pensions paid by the U.S. Office of Personnel Management are reportable and potentially eligible for a pension exclusion depending on the taxpayer’s age and overall gross income.

Then there’s Social Security, which is often subject to federal income tax. For higher income taxpayers, as much as 85 percent of what was received could be taxed, he said.

“Social Security benefits are expressly nontaxable for New Jersey purposes so they would not be reported and would not use up any portion of the pension exclusion,” he said.

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This post was first published in October 2017.

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