I retired early. Can I still take the pension exclusion?

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Q. I’m a New Jersey retired public school teacher. I retired at the age of 61. Can I take the pension exclusion starting for the full tax year that I am 62 or is the exclusion never going to be available because I chose to retire early?
— Retiree

A. Congratulations on your retirement.

Depending on your income level and other eligibility requirements, you may qualify even though you retired early.

Let’s go over how the pension exclusion 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.

The only requirements are your age and income, he said. When you retired is not relevant.

In 2020, pension income was excluded if your income was $100,000 or below, Kiely said. Because 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, he 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 were $3,000 or less,” he said.

On June 29, 2021, Gov. Phil 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 and after, Kiely said.

“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 April 19, 2022.

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