11 Jan Do I have to pay taxes on my state pension?

Q. I retired from my job as a laborer for the Department of Public Works in my town in September 2021. I was at full retirement age at 66. I receive a monthly state pension of $1,180. I’m aware of a three-year pension exclusion. Given that my employer’s total contribution to the pension was $42,581, for federal tax purposes, can I use this exemption or do I need to pay full amount of taxes when I file?
— Retired

A. Congratulations on your retirement.

Based on your question, it seems the three-year exclusion to which you’re referring applies only to your New Jersey income taxes.

In New Jersey, an employee’s pension contribution to the state plan is tax-deferred for federal purposes, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.

“When you begin to receive your pension, it is not taxable to New Jersey until you have recovered your total contribution, which is deemed return of your investment, which normally takes approximately three years,” Gallo said. “Since you did not pay federal taxes on your contribution when they were deducted from your paycheck, you are responsible to pay federal taxes on your pension income in full.”

Since you retired in September of 2021, Gallo said, you would most likely not have to pay New Jersey income taxes on your state pension until late 2024 or early 2025.

“You should also be aware that New Jersey has a retirement income exclusion available to those whose income is less than $150,000,” he said. “There are certain requirements for this exclusion but if you qualify it will greatly reduce the amount of your retirement income subject to New Jersey taxes every year going forward.”

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This story was originally published on Jan. 11, 2023.

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