26 Jan Tax savings? Rules for the pension exclusion

Q. I have a question about what constitutes the hard limit of $100,000 of income for the retiree pension exclusion. If my wife and I have a combined income of $120,000 before deductions, but can legitimately deduct $28,000 due to large medical bills and health insurance premiums paid out of pocket, would we qualify for being below the $100,000 income limitation after the medical deduction is claimed. I’m thinking our taxable income would be $92,000, so do we qualify?
— Taxpayer

A. The retirement income tax exclusion you’re talking about was increased as part of the Transportation Trust Fund and Tax Relief Bill of 2016. This is the same bill that raised the gas tax.

As part of the tax package, state legislators increased the state retirement income tax break for New Jersey residents who are age 62 and over, said Matthew Rheingold, an attorney with Einhorn Harris in Denville.

By 2020, a couple filing jointly with total gross income of $100,000 or less will be able to exclude up to $100,000 of retirement income on their New Jersey income tax return, Rheingold said. Retirement income includes, but is not limited to, pension payouts, annuity income, and 401(k) or IRA withdrawals.

As part of a four-year phase-in, for tax year 2017, if married filing jointly, the retirement income exclusion is $40,000, he said.

The exemption will increase at a rate of $20,000 per year until 2020 when the full exclusion amount applies.

“However, the exclusion is only available if your gross income is $100,000 or less,” Rheingold said. “The $100,000, which is not indexed for inflation, is a cliff. Once you are over $100,000 of New Jersey gross income, you lose the exclusion.”

Rheingold said it’s important to note that New Jersey does not include Social Security benefits in the calculation of income tax.

“Therefore, in your case you would not receive the benefit of the income tax exclusion unless your New Jersey gross income was less than $100,000,” he said. “It is unclear what your income was derived from — however, if you received more than $20,000 from Social Security benefits or other New Jersey nontaxable income, then you would be below the New Jersey gross income threshold.”

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This post was first published in January 2018.