05 Jun How to get the largest pension exclusion

Q. I filed my father’s taxes and they only allowed me to exclude his $39,600 pension. In reading the pension exclusion rules further, it seems that you are allowed to exclude the lesser of your pension or $45,000 of retirement income? It seems a little unfair to those who are making less – he had to still pay taxes on $8,000 of income. Is this the correct interpretation of the law?
— Trying to help

A. New Jersey has two income exclusions for senior citizens when they file their state income taxes.

The first income exclusion is the Pension or Retirement Income Exclusion.

For 2018 the exclusion is $60,000 for those married filing jointly, $30,000 for those married filing separately and $45,000 for singles, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

For 2019, those amounts are $80,000, $40,000 and $60,000 respectively, he said.

“You qualify for the exclusion if you and your spouse were 62 or older or disabled on the last day of the year and your total income for the year was $100,000 or less,” he said. “If only one spouse was 62 or older or disabled, you can still take the maximum pension exclusion. However, you can only exclude the pension, annuity or IRA income of the qualified spouse.”

Kiely said you may be able to exclude other types of income such as salaries, wages, interest and dividends from your total income.

There are two parts to these additional exclusions.

The first part is the “Unclaimed Pension Exclusion.”

“If you did not use the maximum pension exclusion amount, you will qualify to use the unused portion if you and your spouse were 62 or older on the last day of the tax year and your income was $100,000 or less and your income from wages, net profits from an unincorporated business, partnership or S-Corporation was $3,000 or less,” he said.

Then there’s the “Special Exclusion.”

This exclusion is for taxpayers who are not eligible for Social Security or Railroad Retirement benefits.

This exclusion is fairly rare because most people are eligible to receive either Social Security or Railroad Retirement benefits, Kiely said.

“If you qualify, you can use this benefit even if you have used your maximum pension exclusion,” he said. “To qualify, you and your spouse were 62 or older on the last day of your tax year and you and your spouse cannot receive Social Security or Railroad Retirement benefits, but would have been eligible for benefits if you had fully participated in either program.”

If you qualified for the Special Exclusion, you could exclude an additional $6,000 if you are married filing a joint income tax return or $3,000 if you are single or married filing separately.

“In your Dad’s case, he was able to exclude all of $39,600 of his pension. This means he had $5,400 of unused pension exclusion ($45,000 – $39,600), Kiely said.

“In order to be able to apply the unused pension exclusion, his Wages, Schedule C, Partnership or S-Corp income had to be $3,000 or less,” Kiely said. “He probably had more than $3,000 of that type of income.”

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This story was originally published on June 5, 2019.

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