04 Mar I’m retiring soon. How does the pension exclusion work?

Q. I am a New Jersey resident looking to retire soon. I’m a single taxpayer. I understand there is an exclusion on income for retirees. Can you explain the limits?
— Getting closer

A. Congrats on your upcoming retirement.

If you qualify, the pension exclusion can save you a lot in taxes.

Here’s how it works.

New Jersey allows taxpayers aged 62 or older to exclude pension income from taxation if their income was at or below a certain amount, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

In 2020, pension income was excluded if their income was $100,000 or below, Kiely said.

Since New Jersey does not tax Social Security income, the $100,000 does not include Social Security, he said.

“In 2020, the maximum pension exclusion was $100,000 for married couples, $75,000 for singles and $50,000 for married couples filing separately,” Kiely said. “If your income was $100,001 your pension exclusion was not phased out. It was simply gone.”

If your income was at $100,000 or below and you didn’t have sufficient pension income to use up the available exclusion, you could use the unused exclusion to exclude other income if your salaries, wages, proprietorships, partnerships or S-Corporations are $3,000 or less, he said.

But on June 29, 2021, Gov. Phil Murphy signed a law that provides a limited phaseout of the exclusion for taxpayers with income between $100,000 and $150,000 starting in 2021 and after.

“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 retirement income otherwise allowed,” he said. “A taxpayer with more than $125,000 but not more than $150,000 of gross income to exclude 25% of the amount otherwise allowed.”

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This story was originally published on March 4, 2022.

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