12 Sep Is Social Security included as income for the pension exclusion?

Q. How do Social Security totals play into the yearly income calculation for the pension exclusion? I would be under $150,000 for sure without Social Security.
— Taxpayer

A. You’re right to wonder.

Everyone wants to save on taxes when they can, and the pension exclusion provision in New Jersey is quite popular.

The state allows taxpayers aged 62 or older to exclude a certain amount of pension income, including IRAs and 401(k) 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 2021, pension income was excluded if their gross income was $100,000 or below, Kiely said.

Because New Jersey does not tax Social Security income, the $100,000 in gross income does not include Social Security, he said. In 2021, the maximum pension exclusion was $100,000 for married couples, $75,000 for singles and $50,000 for married couples filing separately.

Keily said if your total income is $100,001 up to $125,000, you can deduct a percentage of your retirement income: 50% if you are married filing jointly, 25 % if you a married filing separately and 37.5% if you are single, head of household or a qualifying widow(er).

If your total income is $125,001 up to $150,000, you can deduct a smaller percentage of your retirement income: 25% if you are married filing jointly, 12.5% if you are married filing separately and 18.75% if you are single, head of household or a qualifying widow(er).

“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 `Other Retirement Income Exclusion’ to exclude other income such as wages, interest, dividends, self-employment income and capital gains,” Kiely said. “The `Other Retirement Exclusion’ is available only if your salaries, wages, sole proprietorships, partnerships and S-Corporations were $3,000 or less.”

If your earned income exceeds $3,000, you are not entitled to the “Other Retirement Income Exclusion,” he said.

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This story was originally published on Sept. 12, 2022.

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