10 Jan Income limits for the pension exclusion

Q. I read with interest about the new exclusions for retirement income. Can you explain how it works if I have part-time income, maybe $5,000 a year. My wife collects Social Security and works part-time so that put us over $100,000. Would we pay tax on all or part of it?
— Planning to retire

A. You’re asking about the income cliff for the new pension exclusion.

Here’s how it works.

There are actually two exclusions that can apply against income on your New Jersey tax return.

The first is the pension exclusion that’s available to taxpayers who are 62 or older on December 31, said Cynthia Fusillo, a certified public accountant with Lassus Wherley in New Providence.

“Such taxpayers may exclude some or all of their otherwise taxable pensions and IRA withdrawals as long as gross income does not exceed $100,000,” she said. “Gross income does not include Social Security benefits that you or your wife are collecting. It is specifically exempt from New Jersey State taxation.”

So, she said, you need to recalculate your anticipated gross income to exclude those benefits and perhaps you’ll be below the $100,000 threshold.

You may also take advantage of this exclusion if you qualify as disabled under Social Security guidelines, subject to the same income limitation, she said.

Once qualified, you can exclude some income.

For 2017, those married filing jointly can exclude $40,000 of income — an amount that goes up $20,000 a year until it reaches $100,000 in 2020. Singles can exclude $30,000 in 2017, and those married filing jointly can exclude $20,000.

Note that for joint return filers, if only one spouse is 62 by year-end, then only that spouse may exclude, Fusillo said.

The other retirement income exclusion is also available for taxpayers 62 and over on Dec. 31 with gross income not exceeding $100,000, Fusillo said. Again if only one spouse is 62 or older then that spouse only may exclude under this provision.

“This allows you to exclude other types of income, not just retirement income, from state taxability,” she said. ” This one has two parts to the exclusion.”

Part I allows you to claim the unused portion of your regular pension exclusion, Fusillo said. Aside from age and income, the total amount of your income from wages, businesses, partnerships and S corporations cannot exceed $3,000.

“Judging from your fact pattern, your part time job puts you over this $3,000 limitation,” she said.

Part II is a special exclusion that many taxpayers don’t qualify for, she said.

“Specifically, it applies only to taxpayers 62 or older on Dec. 31 who are not covered by Social Security or Railroad Retirement Benefits,” Fusillo said.

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This post was first published in January 2018.