11 Sep How does N.J. tax my out-of-state pension?
Q. I live in New Jersey and I’m divorced and looking for work. My only income is my pension from New York City which is $3,642 biweekly after taxes from New York City. Will I be taxed in New Jersey or excluded?
A. There are two parts to your question. First, you should consider which state can lawfully tax this pension – New York or New Jersey. Second you would determine whether any part of the income can be excluded from taxation.
The first question as an easy answer, said Laurie Wolfe, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.
She said many states had laws on the books that laid claim to the taxation of retirement income that arose from jobs worked in their states. Other states had laws that taxed their residents on this income regardless of where the work was performed, she said.
“On Jan. 10, 1996, Congress settled these conflicting laws by enacting the Pension Source Tax Act of 1996,” she said.
The law says: “No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State.”
In short, Wolfe said, this law prohibits any state from taxing non-residents for pensions even if they were earned within the state. Because of this law, your pension income will be taxed by New Jersey.
The second part of your question is a little trickier.
Wolfe said New Jersey has a generous pension exclusion, but like most tax breaks it is subject to limitations.
“In order to claim the exclusion you must be 62 years of age or older or blind/disabled as defined by Social Security guidelines on the last day of the year,” she said. “Additionally, your total income as reported on the NJ tax return must be $100,000 or less, regardless of your filing status.”
Your after-tax biweekly pension income of $3,643 will add up to almost $95,000 over the course of the year. But wolfe said you will need to consider your pre-tax income so you could very well be over the limits for the exclusion.
But if you do qualify, in 2019, you can exclude up to $60,000 as a single taxpayer. Married folks can exclude a total of $80,000. These amounts rise to $75,000 for singles and $100,000 for marrieds in 2020 and after, she said.
In addition to this exclusion there is an “Other Retirement Income Exclusion,” she said.
This exclusion allows other types of income, such as wages, interest, dividends, etc. to be excluded.
There are two parts to this “Other Exclusion.”
“If your retirement income was less than the allowable Retirement Exclusion, Part 1 allows you to use the unused portion of exclusion to offset other income but only if your income from wages, net profits from business, partnership income, and S corporation income totals $3,000 or less,” she said.
Part 2 of the Other Exclusion, referred to as the Special Exclusion, only applies to those taxpayers that cannot receive Social Security or Railroad Retirement Benefits but would have been eligible had they enrolled in either plan. This can happen if you contributed to the Social Security program for less than the required 40 quarters, Wolfe said.
“This part allows for an exclusion over and above the Retirement Exclusion amount and is not subject to the $100,000 income limitation,” she said. “The exclusion is $3,000 for single taxpayers and $6,000 for married taxpayers.”
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This story was originally published on Sept. 11, 2019.
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