25 Jun Can we qualify for the pension exclusion?

Q. Do my spouse and I qualify for the pension exclusion? We are both over age 62, and last year we earned: $75,000 from IRA/401(k) distributions, $25,000 from a Roth IRA distribution, $64,000 in Social Security, $30,000 in capital gains from a brokerage account and $10,000 from dividends and interest.
— Retired

A. Nope. you don’t qualify for the pension exclusion. That’s because you have too much income.

To qualify for the pension exclusion, you must have less than $100,000 of gross income for New Jersey purposes.

Let’s take a closer look.

Overall, you have $204,000 of income, but the IRS and the State of New Jersey won’t tax all of it, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said your regular IRA/401(k) income is taxed by both the IRS and the state.

Neither entity taxes your Roth IRA distributions.

“The IRS taxes either zero, 50 percent or 85 percent of your Social Security income. In your case, the IRS is taxing 85 percent of your Social Security,” Kiely said. “New Jersey does not tax any of your Social Security income.”

Then capital gains, interest and dividend income are all taxed by both the IRS and the state, he said.

“For federal income tax purposes, you have $169,400 in gross income, and for New Jersey purposes you have $115,000 – $15,000 over the $100,000 limit,” he said.”If you are one dollar over the limit, you get no pension exclusion. It’s not phased out. It is simply gone.”

So what can you do going forward to qualify for the pension exclusion?

You said you are both over 62. If you’re not yet 70 ½, you are not required to take distributions from your regular IRA, Kiely said.

“I would recommend you take less out of your regular IRA and more out of your Roth IRA,” he said. “Neither the IRS nor New Jersey tax Roth IRA distributions.”

By taking less regular IRA and more Roth, you would have a better shot at qualifying for the pension exclusion – and you’d save on federal taxes, too, Kiely said.

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This story was originally published on June 25, 2019.

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