03 Mar Do these retirement distributions count for the pension exclusion?

Q. Do distributions marked as IRA/SEP/SIMPLE with Code 7 on a 1099-R fall under the pension exclusion?
— Doing my taxes

A. We’re glad to see you’re working on your tax returns.

The New Jersey pension exclusion allows those who are age 62 or older or blind/disabled on the last day of the year and who have total income of less than $100,000 to exclude that income from your New Jersey return.

If your income exceeds this $100,000 threshold by even a dollar, you cannot claim any exclusion at all, said Laurie Wolfe, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

It’s also important to note that New Jersey total income can be different from federal taxable income. Social Security benefits, New Jersey municipal bond interest and U.S. bond interest are not taxable to New Jersey and would not be included in total income for this purpose, she said.

To your question, Wolfe said, the taxable portion of the distributions marked with Code 7 on a 1099-R are eligible for exclusion on the New Jersey tax return if you meet a few criteria.

Form 1099-R reflects both gross and taxable retirement income for federal tax purposes, she said. The taxable amount for New Jersey could be different.

“New Jersey does not allow deductions for IRA contributions and therefore those contributions are not taxable by New Jersey when they are withdrawn,” Wolfe said. “If your account was rolled over from an employer plan, other differences in taxability for New Jersey purposes can occur as well because New Jersey used to tax those contributions.”

She said once New Jersey taxability is determined, you can figure your exclusion amount.

In 2020, the exclusion amount is $75,000 for single filers and $100,000 for those that are married, Wolfe said. Those married filing separately can exclude $50,000 on their 2020 returns.

You’re probably working on you 2019 returns, and the exclusion is lower for that year: $80,000 for those who are married filing jointly, $60,000 for singles and $40,000 for those married filing separately.

If your pension income is less than the amount of your allowable exclusion, you can use the balance to offset other income, like wages, interest and dividends on your return. This portion of the exclusion is called the “unclaimed exclusion,” she said.

Also important to note, Wolfe said, is that if you are married and only one of you is 62 or older or disabled, you can still claim the maximum pension exclusion amount. However, only the income of the spouse who is 62 or older or disabled can be excluded.

Also, part-year residents must prorate the pension exclusion amount by the number of months spent as a New Jersey resident and their income must have been $100,000 or less for the entire year, not just the portion of the year that they were New Jersey residents, Wolfe said.

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This story was originally published on March 3, 2020.

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