Will we get the pension exclusion?

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Q. I’m confused about the pension tax exclusion for retirees. If my pension is $71,000 and my husband’s is $52,000, can we claim any exclusion? What if I also earn $15,000 in part-time work? And what about our Social Security payment?
— Retiree

A. New Jersey’s pension exclusion, which allows some retirees to avoid state income taxes, has specific limits — so not everyone qualifies.

The pension exclusion can only be claimed when total gross income does not exceed $100,000, and in the case of a joint filer, at least one spouse has reached age 62, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

Based on the information you provided, your pension income alone totals $123,000, so you’d be ineligible to claim any pension exclusion, he said.

It’s important to realize that the exclusion only comes into play after you’ve added together your income.

This kind of math has been confusing for some, and here’s where the common error comes in. If you figured you had pension income of $123,000 plus $15,000 of wages, your income would total $138,000. Some mistakenly think after subtracting the $40,000 pension exclusion for 2017, your income would be $98,000. But that’s not how it works.

Becourtney said the gross income can’t exceed $100,000, and the exclusion amount isn’t something you can subtract from your total to reach that target number.

You may notice we excluded Social Security income as part of the calculation.

That’s because Social Security benefits, which can be subject to federal income tax, are never taxed by New Jersey, Becourtney said.

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This post was first published in February 2018.

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