25 Oct How much can I save on taxes from the pension exclusion?

Q. The Division of Taxation webpage states in the pension exclusion section: “If your total income is $100,000 or less, you can exclude reported taxable pension, annuity, and IRA withdrawals up to the maximum amount for your filing status,” which for single is $75,000. Does this mean that a single filer with $90,000 of retirement income pays income tax only the amount that exceeds $75,000? Or does the entire amount of $90,000 then become fully taxable?
— Saver

A. There’s often confusion about the pension exclusion between how much one can exclude from income and the total income amount you must have to qualify.

The current law allows an exclusion for retirement income, which includes pensions, annuities and IRA distributions, of up to $75,000 for single taxpayers and $100,000 for married taxpayers filing jointly if you qualify, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.

To qualify, the taxpayer must be at least 62 years of age or disabled based on federal Social Security guidelines, and their total income must be under $100,000, Gallo said.

On June 29, 2021, Gov. Murphy signed a law that provides a limited phase-out of the exclusion for taxpayers with income between $100,000 and $150,000 starting in 2021. Under the new law, a taxpayer with gross income of more than $100,000 but not over $125,000 may exclude 50% of the pension, and a taxpayer with more than $125,000 but not more than $150,000 of gross income can exclude 25%.

The key here is the term “total income,” Gallo said.

“If your total income is $90,000 and it is all from pensions, annuities or IRA distributions, you qualify since your total income is under $100,000,” Gallo said. “You can exclude the first $75,000 of that retirement income if you are single and only pay income tax on the remaining $15,000 of your retirement income.”

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This story was originally published on Oct. 25, 2021.

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