22 Jul Will inheritance stop me from getting the pension exclusion?

Q. I am a retired police officer living in New Jersey. My wife and I file jointly. We currently take the pension exclusion deduction because our income is less than $100,000. My wife stands to inherit assets from the estate of an aunt who lives in Florida. Will we have to pay the inheritance tax and will we lose the pension exclusion?
— Retired

A. If your wife’s aunt lived in New Jersey, you would absolutely face the inheritance tax.

But the inheritance will have no impact on your state tax return – unless your wife starts receiving income from the inheritance.

For example, if someone inherits an IRA, there will be tax on the distribution, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

“Similar items, such as the interest on U.S. Savings Bonds or a pro-rata share of income earned during the estate’s administration, may be taxable to the beneficiaries, but only for income taxes and not for inheritance taxes,” Karu said.

Share of stock, any amount of cash, real estate, or an ownership in a business would have no tax, he said.

On the pension exclusion: If your wife does receive income from the inheritance assets, and if it pushes your income over $100,000, you will no longer be eligible for the pension exclusion.

That begs the question of whether it makes sense to file separate tax returns to take advantage of the exclusion. You can learn more about that here.

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This story was originally published on July 22, 2019.

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