09 May Does this income qualify for the pension exclusion?

Q. I will be retiring soon. The only income I expect in the future reported on a W-2 form is about $6,000 a year from a former employer for a non-qualified pension. This was because I had reached the IRS limit for the qualified pension and my employer made up the excess in the non-qualified plan. I thought that this money would be reported on a 1099-R form, but it is reported on a W-2 form instead. Does this disqualify me from the pension exclusion because the annual W-2 exceeds $3,000? Box 11 on the W-2 has the same amount as boxes 1 and 16; boxes 3 -10, 12 -14, 17 – 20 and have $0.00 or are blank. I have not worked for this employer for over 10 years and the amount I receive is constant.
— Still working

A. Congratulations on your pending retirement.

It’s important to know how your tax liabilities will change.

Let’s review how the pension exclusion works.

New Jersey taxpayers can exclude all or part of their retirement and pension income if they meet the certain qualifications, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

You — and/or your spouse if you are filing jointly — must be 62 or older or those who, because of a disability, are eligible for Social Security benefits, can qualify if their total income for the entire year was $150,000 or less, he said.

If you qualify, you can claim the lessor of your actual taxable pension income or the maximum pension exclusion for your filing status, he said.

If your gross income is less than $100,000 you can exclude up to 100% for those married filing jointly, 75% if you’re filing single or 50% if you’re married and filing a separate return, he said.

If gross income is $100,001 to $125,000, you can exclude up to 50% if you’re married and filing a joint return, 37.5% for singles and 25% for those married filing separately, he said.

And finally, if your gross income is $125,001 to $150,000, you can exclude up to 25% for those married filing jointly, 18.75% for singles and 12.5% for those married filing separately, he said.

Papetti said the pension exclusion includes all taxable pension and retirement income including wages, taxable interest, dividends, net profit from business, net gains from a property, pensions, annuities and IRA withdrawals. It also includes income from partnerships, S-Corporations, rents, royalties, patents, copyrights, gambling winnings and alimony.

It does not include Social Security or pension income from the private or public sector as a result of permanent or total disability received prior to age 65. Once the disabled taxpayer attains age 65, the pension income is no longer exempt and is included, he said. It also does not include U.S. military or survivor benefits or tax-exempt interest.

Now to your specific question.

“In general, non-qualified deferred compensation plans report distributions to a retired/former employee on Form W-2, not Form 1099-R, which unfortunately will not allow you to claim the New Jersey pension exclusion, however you may be able to exclude other types of income by using the Other Retirement Income Exclusion,” Papetti said.

This has two parts.

The unclaimed pension exclusion is a special exclusion for taxpayers who cannot receive Social Security or Railroad Retirement benefits, Papetti said

To qualify, you and/or your spouse if you are filing jointly must be 62 or older or those who, because of a disability, are eligible for Social Security benefits, and your total income for the entire year was $150,000 or less. Then, earned income from wages, net profits from business, distributive share of partnership income and S-Corporation income must be $3,000 or less, and you did not not use the maximum pension exclusion amount, he said.

As you noted, Box 11 on your W-2 notes that the amount noted in Wages Box 1, which indicates that the amount is not earned income but deferred compensation, Papetti said.

“In your specific situation the amount paid is a non-qualified supplemental pension,” he said. “Therefore, if you meet the other requirements noted above for the Other Retirement Income Exclusion, you should report the $6,000 of non-qualified deferred compensation on the Other Retirement Income Exclusion line 28b Form NJ 1040.”

If New Jersey questions your ability to use the Unclaimed Pension Exclusion under the Other Retirement Income Exclusion, you may need to provide a written explanation supporting your position, Papetti said.

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This story was originally published May 9, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.