12 May Will we save on taxes if we file separately?

Q. I am 64 with almost all of my 2019 income from pensions and an IRA. My wife has a full-time job and a large capital gain from a home sale that puts our income, together, above the $100,000 limit for the pension exclusion. If we file married filing separately, would we save on taxes?
— Calculating

A. The New Jersey pension exclusion is available to taxpayers who are 62 or older on Dec. 31 of the tax year.

Such taxpayers may exclude some or all of their otherwise taxable pensions and IRA withdrawals as long as their gross income does not exceed $100,000, said Cynthia Fusillo, a certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

She said for for joint return filers, if only one spouse is 62 by year-end, then only that spouse may exclude.

There is another retirement income exclusion also available for taxpayers 62 and over on Dec. 31 with gross income not exceeding $100,000, she said. This allows you to exclude other types of income, not just retirement income, from state taxability.

This one has two parts to the exclusion.

“Part I allows you to claim the unused portion of your regular pension exclusion. Aside from age and income, the total amount of your income from wages, businesses, partnerships and S corporations cannot exceed $3,000,” Fusillo said. “Judging from your fact pattern, your part time job puts you over this $3,000 limitation.”

There is a Part II, a special exclusion, that many taxpayers don’t qualify for. Specifically, it applies only to taxpayers 62 or older on Dec. 31 who are not covered by Social Security or Railroad Retirement Benefits, she said.

Now to your scenario.

Fusillo said filing a separate return could alleviate your problem, depending on the numbers.

“As you might imagine, the retirement income exclusion for a married person filing separately is half that of the amount for a jointly filed return,” she said. “Therefore, for 2020 tax returns, the maximum excludable amount would be $100,000 for a jointly filed return and $50,000 for a separately filed return.”

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This story was originally published on May 12, 2020.

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