06 Oct Will our retirement income be excluded from taxes?

Q. I am thinking about retiring at age 61 and moving to New Jersey. My wife is 57. I will be collecting a civil service pension of around $56,000 a year. She will be receiving a small Social Security payment of $400 a month. When we are both 62, will my pension be excluded from New Jersey taxes? Also, what happens if I take money from my retirement account that puts us over $100,000 of income?
— Considering

A. People often say New Jersey has been one of the worst states to retire in because of our income tax and property tax rates, with limited deductions.

But the pension exclusion makes a big difference for retirees — if they qualify.

Beginning with tax year 2021, the income limit for the pension exclusion is $150,000, but it’s a phase-out, said Bill Connington of Connington Wealth Management in Paramus.

The state’s Division of Taxation says you can exclude all or part of the pension income reported if you meet the following qualifications:

· You (and/or your spouse/civil union partner, if filing jointly) were 62 or older or disabled as defined by Social Security guidelines on the last day of the tax year (Dec. 31 for calendar year filers); and

· Your total income for the entire year was $150,000 or less.

“When you and your spouse/civil union partner file a joint return and only one of you is 62 or older or disabled, you can still claim the maximum pension exclusion,” it says. “However, you can exclude only the pension, annuity, or IRA withdrawal of the qualified spouse/civil union partner.”

It says if you qualify, you can claim the lesser of your actual taxable pension income or the maximum pension exclusion amount for your filing status and gross income.

If your total income is $100,000 or less, married couples can exclude reported taxable pension, annuity, and IRA withdrawals up to $100,000. For singles, it’s $75,000 and for those married filing separately, it’s $75,000.

If a married couple’s total income is between $100,001 and $125,000, you can exclude 50% of your retirement income. From $125,000 up to $150,000, you can exclude 25%.

But once you hit that $150,000 mark, you’re out of luck and can’t use the exclusion at all.

You can learn more on the Division of Taxation’s website.

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This story was originally published on Oct. 6, 2021.

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