12 Jun I work for the county. How will my pension be taxed?

Q. I work for county government and hope to retire in the next few years when I am 60 years old. I will have a pension. How will federal income tax be calculated? I believe New Jersey won’t tax the pension.
— Still working

A. Congratulations on your pending retirement.

Your tax situation will depend on several issues.

First, your retirement income will be subject to tax, said Ken Bagner, a certified public accountant with CLA in Livingston.

“You can, however, choose a method called the three-year method whereby your pension is not reported as taxable income until you receive back all of your employee contributions into your pension,” Bagner said.

According to the state’s website, if you were required to contribute to your retirement plan, it is a contributory plan. Contributions are usually made through payroll deductions, and, in general, have already been taxed. Your contributions are not taxed when withdrawn. However, any employer contributions and earnings that have not been taxed must be reported, it says.

It says there are two methods you can use to calculate these amounts: the three-year rule method and general rule method.

“If you use the general rule method, part of your pension or annuity payment is taxable and part is excluded from your income every year,” it said. “If you are filing a resident return, you must report both the taxable and excludable portions of your distribution on the separate lines provided for that purpose on Form NJ-1040.”

But also remember that New Jersey has a pension exclusion for those age 62 and older, Bagner said.

For those married filing jointly, if your total income is $100,000 or less, your taxable pension can be excluded. If your income is up to $125,000, you can exclude 50% and if it’s up to $150,000, you can exclude 25%. If your income is higher than $150,000, you’re not eligible, he said.

You should consider working with a qualified tax preparer to make sure you choose the options best for you.

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This story was originally published on June 12, 2023.

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.