12 Aug Will my IRA stop me from getting the pension exclusion?

Q. If a taxpayer is under age 62 but is considered disabled by the IRS, and their total income line 27 is $117,692, can they use the retirement exclusion if this line 27 includes IRA income of $98,500?
— Hoping

A. New Jersey offers a tax break for certain residents who have income of less than $100,000 a year.

Commonly called the pension exclusion, this benefit has two-pronged test for eligibility. For you, it’s not good news.

You, and your spouse if filing a joint return, must be 62 or older or disabled as defined by the Social Security Administration’s guidelines and your total income for the year must be less than $100,000, said Cynthia Fusillo, a certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

She said the pension exclusion allows you to exclude actual income from pension-type accounts or a max amount based on your filing status for the year.

For the 2020 tax year, you could exclude pension income of up to $100,000 if filing jointly, $50,000 if filing separately or $75,000 if filing as a single, head of household or qualifying widow(er), she said.

There’s a second retirement income exclusion that allows you to use any unused portion of the pension exclusion against other types of income, such as wages, investment income and more, she said.

“However, in both cases, the total income limit of $100,000 is a cliff, meaning that even one dollar over gets you zero of an exclusion,” Fusillo said. “You have said that your total income is $117,692, meaning you are over the cliff threshold and would not qualify for either exclusion.”

Fusillo said you’ve indicated that a good portion of your total income comes from distributions from an Individual Retirement Account (IRA). This is irrelevant as the components of the $100,000 cliff amount are not taken into consideration, Fusillo said.

Please note that this is a New Jersey state exclusion provision. There is no such exclusion at the federal level.

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This story was originally published on Aug. 12, 2020.

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