16 Feb How much tax will I have to pay on my pension?

Q. I’m a New Jersey resident, age 55, single and retired with a New York City pension of $88,000 a year. I know New York will not tax my pension, but New Jersey will because I’m not yet eligible for the pension exclusion. How much income tax will I have to pay on the pension?
— Planning

A. Calculating an individual’s taxation as it relates to their pension differs from taxpayer to taxpayer.

There can be so many variables depending on the other details of your financial life.

But here are the items to consider.

First, you’ll have to look at contributions to your pension plan, said Anibal Guerrero Russo, a certified financial planner with Peapack Private Wealth Management in Bedminster.

He said if your pension plan was “contributory,” as the name suggests, it meant that as an employee, you were required to make contributions, which could’ve possibly been made with after-tax monies.

Because those contributions were already taxed, part of your pension will not be taxable when you begin withdrawing, he said.

New Jersey’s “Retirement Income” publication says that if an individual had contributed to a pension or annuity plan before moving to New Jersey, for tax purposes, the treatment would be the same had you lived in New Jersey, he said.

“There are two methods to calculate how much of your pension income will be excluded: the Three-Year or General Rule,” Guerrero Russo said. “Utilizing the right approach to calculate your taxable and nontaxable pension amount is critical because you may owe additional tax, penalty, and interest if not done correctly.”

The New Jersey tax law also provides additional exclusions related to pension income, he said.

For example, suppose the pension exclusion is utilized. In that case, it offers an individual who is 62 years or older or disabled as defined by Social Security guidelines on Dec. 31, and income for the entire year was less than $150,000, to be eligible to partially exclude the taxable pension income, he said.

Another exclusion available is the unclaimed pension exclusion, which allows individuals to utilize their unclaimed portion of the pension exclusion against other types of income, such as wages, interest and dividends, he said.

“Navigating New Jersey tax can be met with a multitude of regulations that require an individual to work alongside their tax professional,” he said. “We recommend connecting with such an individual who will understand your situation and advise directly concerning your circumstances.”

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This story was originally published in February 2024.

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.