29 Mar Pension exclusion if you’re married filing separately

Q. For the pension exclusion, if your gross income is one dollar more than $100,000, you get zero exclusion. But what if you file married filing separately? My wife and I have total income of $110,000, but we file separate returns amounting to $55,000 each, which includes 40,000 each of taxable pensions. So would we qualify? We also filed estimated taxes together. How much does each filer include as their own?
— Taxed enough

A. Here’s how the pension exclusion works.

You qualify if you are 62 or older, or if you have a disability and are eligible for Social Security benefits, and if you have less than $100,000 of gross income, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

“For a married couple filing jointly, the level at which income taxes are excluded is $60,000 after Jan. 1, 2018, will increase to $80,000 after Jan. 1, 2019, and to $100,000 after Jan. 1, 2020,” Papetti said.

For a married person filing separately, the exclusion is $30,000 after Jan. 1, 2018, will increase to $40,000 after Jan. 1, 2019, and to $50,000 after Jan. 1, 2020, he said.

And for singles, the exclusion is $45,000 after Jan. 1, 2018, will increase to $60,000 after Jan. 1, 2019, and to $75,000 after Jan. 1, 2020.

The income that’s considered for the exclusion includes all taxable New Jersey income, Papetti said. Specifically:

• Wages
• Taxable interest
• Dividends
• Net profits from business
• Net gains from the disposition of property
• Pensions, annuities, and IRA withdrawals
• Partnership income
• S-Corporation income
• Net income from rents, royalties, patents, copyrights
• Net gambling winnings
• Alimony
• Any other taxable income subject to New Jersey tax

For exclusion purposes, the following is not included:

• Social Security income
• Tax-exempt interest from obligations of the State of New Jersey or any of its political subdivisions
• Tax-exempt interest from direct federal obligations, such as U.S. Savings Bonds and U.S. Treasury Bills, Bonds, and Notes

Now to address your strategy of filing your taxes as married filing separately.

In this case, the $100,000 income limit applies to each spouse filing a separate return, Papetti said.

“If we use your example, each spouse would report income separately based on who the income was attributable to,” he said. “If the income split was equal as you state, $55,000 of gross income of which $40,000 was pension income would be reported by each spouse and each would be entitled to a $30,000 pension exclusion.”

Now to your question on how to allocate joint estimated tax payments.

Papetti said this is addressed in regulations section 1.6015(b)-1(b), which provides that when a joint declaration of estimated tax is paid but a married filing joint return is not filed for the same tax year, the payments may be treated as being made by either spouse, or may be divided between them in any manner agreeable to them.

“However, if the spouses do not agree to a division, the payments are to be allocated to each of them in the ratio of each spouse’s separate tax to the aggregate tax imposed,” Papetti said.

This story was originally published in March 2019.

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