03 Jan I’m retiring at 56. How will my retirement income be taxed?

Q. I’m 56. I retired recently and received a lump sum of which I’m going to use to buy an annuity. Is it considered retirement income and do I get a reduced tax rate living in New Jersey, and if not, will I get a reduced rate that kicks in later?
— Free, but not of tax

A. Congrats on your early retirement.

New Jersey does offer two potential retirement income exclusions, both of which are age and income restricted.

That may present a problem for you in the next decade.

The first exclusion called the pension exclusion, and the second is known as the “Other Retirement Income Exclusion,” said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

He said both require the person to be age 62 or older.

“The pension income exclusion is fully available for those over age 62 and with total income less than $100,000,” he said. “It’s important to point out that Social Security income is not taxable in New Jersey and therefore excluded for determining income for pension exclusion.”

The credit is $100,000 for married couples filing a joint tax return, $50,000 for those who file separately and $75,000 for singles who fully qualify, he said.

“The credit phases out for incomes between $100,001 up to $150,000 with a complete phase-out above $150,000 of income,” he said.

The “Other Retirement Income Exclusion” is potentially available for those with incomes of less than $150,000, over age 62 and with income from wages, net profits from business, distributive share of partnership income, and net pro rata shares of S Corp income totaling $3,000 or less, he said.

“In essence, this other exclusion potentially shields additional retiree income if the full pension income exclusion credit wasn’t used,” he said. “So the reader, when they turn 62, depending on their income, gets an income exclusion for their annuity income depending on the particulars of their situation.”

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This story was originally published in January 2024.

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