08 Feb Will my $80K pension be taxed when I retire?

Q. If I retire at 62 with a pension of $80,000, can I exclude the entire pension from New Jersey tax?
— Considering

A. Congratulations on your pending retirement.

When it comes to state taxes, we may have good news for you.

First, the pension, along with any other investment and retirement income you have, would be subject to federal income tax, said Patricia Daquila, a certified financial planner and certified public accountant with Peapack Private Wealth Management in Summit.

But if you live in New Jersey, the state has a retirement income exclusion that if you qualify, could reduce or even eliminate your New Jersey taxable income, she said.

“To qualify for this retirement income exclusion beginning in tax year 2021 and after, it depends on what your total income is for the year and your age,” Daquila said. “If you are age 62 and older or disabled, and your total income for the year is less than $150,000, then you can exclude all or part of your pension, annuity or IRA withdrawal.”

Exactly how much you can exclude depends on your filing status and your total income, she said.

If you are married filing a joint return, and your total income is under $100,000, then you can exclude up to $100,000, Daquila said. If you are single, and your total income is under $100,000, then the exclusion is $75,000. If you are married filing a separate return, and your total income is under $100,000, then the exclusion is $50,000.

If your total income exceeds $100,000 but is not more than $150,000, then you can exclude a percentage of your reported pension, annuity, and IRA withdrawals, Daquila said. The percentage is determined based on your total income.

If your total income is between $100,001 and $125,000 then you can exclude up to 50% for married filing jointly, 37.5% if you are single and 25% if you are married filing separately, she said.

If your total income exceeds $125,001 but is under $150,000, then the percentage is reduced to 25% for married filing a joint return, 18.75% for filing single and 12.5% for filing married filing separately, she said.

If your total income exceeds $150,001, then you are not eligible for a pension exclusion in New Jersey,s he said.

“You may also qualify for other retirement income exclusion if your total income is $150,000 or less and your income from wages, net profits from business or partnership or S corporation income is less than $3,000,’ Daquila said. “However, you need to complete worksheet D in the NJ 1040 instructions to determine if you qualify to take the Other Retirement Income Exclusion, and if so to calculate the amount to include on your tax return.”

If you’re not sure, consult with a tax advisor who can review the specifics of your situation.

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This story was originally published on Feb. 8, 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.