15 Oct If I take from my Roth IRA, will I get the pension exclusion?

Q. My wife and I are both over 62 with income of $130,000: $52,000 from IRA distributions, $25,000 in pension payments, $18,000 of investment income and $35,000 from Social Security. Would we currently qualify for the exclusion and would an additional Roth IRA distribution put that exclusion in jeopardy?
— Trying to pay less

A. New Jersey has two income exclusions for senior citizens when they file their state income taxes.

The first income exclusion is the Pension or Retirement Income Exclusion, commonly called the pension exclusion, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

For 2020, he said, the pension exclusion amounts are $100,000 for those who are married filing jointly, $50,000 for those who are married filing separately, and it’s $75,000 for singles.

“You qualify for the exclusion if you and your spouse were 62 or older or disabled on the last day of the year and your total income for the year was $100,000 or less,” he said “If only one spouse was 62 or older or disabled, you can still take the maximum pension exclusion.”

But, he said, you can only exclude the pension, annuity or IRA income of the qualified spouse.

Then there’s another exclusion called the “Other Retirement Income Exclusion.”

Kiely said with this one, you may be able to exclude other types of income such as salaries, wages, interest and dividends from your total income.

There are two parts to these additional exclusions, he said.

The first part is the Unclaimed Pension Exclusion. If you did not use the maximum pension exclusion amount, you will qualify to use the unused portion if you and your spouse were 62 or older on the last day of the tax year and your income was $100,000 or less and your income from wages, net profits from an unincorporated business, partnership or S-Corporation was $3,000 or less, he said.

In your situation, your New Jersey income is $95,000 — not $130,000 — because New Jersey does not tax Social Security income. You have:

“You will be able to use $77,000 of the $100,000 maximum pension exclusion to exclude your IRA and pension income, leaving the remaining $17,000 of other income,” he said. “Since the remaining income is more than $3,000 you won’t be able to use any of the remaining unused pension exclusion.”

Now for the good news.

Kiely said you can deduct your real estate tax, up to a maximum of $15,000, from the $18,000, plus $1,000 personal exemption for each of you. If either of you are over 65 years old, you can deduct an additional $1,000. If either of you are a military veteran, you can deduct an additional $6,000 for the veteran’s exemption, Kiely said.

On taking another $5,000 from your Roth, you do not have to include a qualified distribution from a Roth IRA in your New Jersey income in the year you received it, whether it is a periodic distribution or a lump-sum distribution, according to the Division of Taxation. A qualified distribution means a payment distributed after a five-year waiting period.

But you should still be careful because you’re close to the $100,000 cutoff for eligibility.

“When you go over $100,000 the exclusion is not phased out. It is simply gone,” Kiely said. “If they are accidently over be a single dollar, you lose the complete exemption.”

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This story was originally published on Oct. 15, 2020.

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