Can we file separately to get the pension exclusion?


Q. My husband and I together have an adjusted gross income of $133,000, taxable income of $107,000. Filing separately, we both have taxable income of less than $100,000. Can we qualify for the pension exclusion if we file separately?
— Working on it

A. The pension exclusion is a great benefit – if you qualify.

In 2018, for those who qualify, the pension exclusion will be $60,000 for married filing jointly taxpayers, $45,000 for single and head of household taxpayers and $30,000 for married filing separate taxpayers, said Michael Driscoll, a certified public accountant with Driscoll & DeSimone in Ringoes.

“This has been a great benefit to consider for those individuals looking to hightail it out of the Garden State post-retirement,” Driscoll said. “Unfortunately, the exclusion only benefits taxpayers with taxable income under $100,000, which isn’t an easy task keeping up with New Jersey’s high cost of living.”

So can the pension exclusion can be used by both married taxpayers in the instance?

If they both qualify under the exclusion rules – both are 62 years or older on last day of tax year and total income for each is under $100,000 – the answer is yes, Driscoll said. You would both be able to claim the exemption up to your total pension amount or $30,000, whichever is lower.

One important thing to take into consideration, Driscoll said, is that when filing separately on the New Jersey return, you will also most likely have to file separately on the federal return.

He said in many cases, this is not advantageous.

“What is considered taxable income on a New Jersey return is often not the same as what is considered taxable on the federal return,” he said. “An example of this are Social Security benefits, which in many cases, taxpayers that are receiving pension benefits are likely also receiving.”

The same holds true for deductions. Driscoll said there may be an apparent benefit on the state return by filing separately and using the pension exclusion, but it’s important to determine whether this benefit outweighs the likely disadvantage of filing separately on the federal return.

As with most situations, it’s always important to consult a tax professional who can consider your entire tax situation – and this is important to do before you file.

“While married couples who file separately can go back and amend to a joint return, if you file your return jointly you cannot go back and amend to separate,” he said.

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