All or nothing for pension exclusion

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Q. I’m confused about the pension exclusion. Is it correct that a person who is married filing separately can exclude up to $20,000 of retirement income for 2017 if his taxable income is below $50,000? And that if it’s above $50,000 he gets to exclude none of it? Is the pension income included in the calculation? If I have $41,000 in non-pension income and $10,000 in pension I am reading that I would get none of it excluded — which is ridiculous. The law should be $50,000 in non-pension taxable income.
— Thinking it’s not fair

A. You’re talking about the cliff for the pension exclusion, and you’re correct in your assumptions.

For New Jersey tax purposes, you can exclude a specified amount of pension, annuities and IRA retirement income depending on your filing status, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

He said in your specific situation of being married and filing a separate return, you can exclude up to $20,000 of pension income in 2017 subject to an income limitation, Papetti said.

He said New Jersey categorizes pensions into two categories: non-contributory or contributory.

“A non-contributory pension is one that the taxpayer has not made contributions to and a contributory is one that the taxpayer has made contributions to,” he said. “The taxable amount of your pension for New Jersey tax purposes is dependent on whether you made contributions or not.”

For purposes of your question, Papetti assumed you have not made any contributions to your pension so 100 percent is subject to New Jersey tax.

Papetti said New Jersey tax law provides three retirement income exclusions: the Pension Exclusion and Other Retirement Income Exclusion Part I and Part II.

To qualify for the pension exclusion, you must be age 62 or older or disabled as defined under Social Security guidelines at the end of the year, and your total income for the entire year must be $100,000 or less.

“As noted, if you are married filing a separate return, the maximum exclusion for the 2017 tax year is $20,000,” he said. “You indicated that your income must be less than $50,000, however the income limit for all taxpayers is $100,000 and it does include all income including taxable pension and retirement income — however it does not include any Social Security income you receive.”

On the Unclaimed Pension Exclusion Part I, Papetti said, if you did not claim the maximum pension exclusion amount, you may be able to use the unclaimed portion of your pension exclusion to exclude other types of income, such as wages, interest, and dividends, on your return.

To qualify, your total income cannot exceed $100,000 and your earned income from wage and net profits from business, including partnerships and S-Corps, cannot exceed $3,000.

For the Part II exclusion, Papetti said, there’s a special exclusion available for taxpayers who are 62 or older and who are not covered by Social Security or Railroad Retirement Benefits.

“You can claim this whether or not you use the maximum pension exclusion,” he said.

Email your questions to moc.p1596880553leHye1596880553noMJN1596880553@ksA1596880553.

The post was originally published in November 2017. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.