16 May Will filing separately get us the pension exclusion?

Q. When might it be better for a married couple to file separately? Must a couple file the New Jersey state return the same way they do the federal return? If one spouse has too high an income to receive the New Jersey pension exclusion but the other spouse would qualify, would it make sense to file separately?
— Trying to save

A. Let’s run through all your questions.

First, the instructions to the 2017 New Jersey 1040 tax return say: “In general, you must use the same filing status on your New Jersey return as you do for federal purposes.”

So if you file jointly with your spouse on your federal return, you are required to file jointly on your New Jersey tax return, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Same goes if you file Married Filing Separately.

“Married Filing Separately is not the same as filing as a single person,” Kiely said. “Married people cannot file as a single person. The rules and tax rates are very different for Married Filing Separately and filing as a single person.”

So when does it pay for a married couple to file their state taxes separately?

Kiely said there are two deductions that are limited by your income.

The first is the medical expense deduction.

“This deduction is limited to the amount that exceeds two percent of your income,” Kiely said. “So if one of the couple has significant medical expenses and lower income, it might pay to file separately.”

The second deduction is the pension exclusion.

Kiely said the pension exclusion allows you to deduct your pension and/or other income if you are over 62 and your total income for the year was $100,000 or less. If your income is over $100,000 the exclusion is not phased out — it is simply gone.

The exclusion is scheduled to increase over the next few years until it reaches $100,000 for those Mailing Filing Jointly.

But here’s the rub: The exclusion for those Married Filing Separately is half of what can be taken by couples who file jointly — but the $100,000 income limitation remains the same.

Kiely offered this example: Let’s assume a married couple known as C is made up of person A and person B. In 2017, person A had $50,000 in income and person B had $125,000 for a total of $175,000. They are both over 62, but because their combined income exceeds $100,000, they were not eligible for the $40,000 pension exclusion. As a result their combined state income tax was $7,105.

Now let us assume they filed separately. Person A’s income is less than $100,000 so A is entitled to exclude $20,000 which reduced his taxable income to $30,000. Please note that A was entitled to $20,000 exclusion — not $40,000.

This results in A’s married filing separately tax to be $455. Person B’s income is $125,000 which makes her ineligible for the pension exclusion. Person B’s married filing separately tax is $5,836.

The combined married filing separately tax is $6,291 — $814 savings.

Kiely said before you file separately, be sure to do the math. Calculate your tax both ways before you decide.

“A final reminder: if you file jointly you cannot amend your return to file separately,” he said. “If you file separately, you can later amend your return to file jointly.”

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