Retirees Positively Affected by Recently Passed Legislation
Two pieces of legislation positively affecting TPAF and PERS retirees were signed by the Governor in early December: Chapter 57, P.L. 2016 and Chapter 83, 2016. Both laws provide security for retirees, although in different ways.
Chapter 83, a bipartisan piece of legislation, requires that funding of all the State’s defined benefit pension plans be made on a regular basis beginning in fiscal year 2018. The law requires that the State make the required employer contributions to each plan on a quarterly basis in the following manner: at least 25% of the annual contribution shall be made by September 30, at least 50% of the annual contribution shall be made by December 31, at least 75% of the annual contribution shall be made by March 31 and at least 100% of the annual contribution shall be made by June 30. This scheduling of the contribution to the retirement systems on a quarterly basis should end the annual wrangling that has gone on for many years regarding the amount of the required contribution and the amount that the State actual contributes (which for many years has been zero). It also eliminates the delay in making the full pension contribution on June 30, the end of the fiscal year, which has been the date that past pension contributions were made.
If followed, the quarterly funding of the systems should begin to close the gap that now exists between the actual amount currently in each system and the amount that the actuaries say should be in each system. It should also quiet the statements that the system is in dire fiscal condition, which have made the pension system a political football. Contributions by the members of each system and continual contributions by the State along with prudent investment returns should eventually return the system to fiscal soundness in a number of years.
Chapter 57 is a law that covers a multitude of revenue and tax issues. Included in the legislation is an increase in the gas tax, a decrease in the sales tax, the elimination of the State estate tax in two years, an increase in the earned income tax credit, and an increase over four years in the amount of retirement income that can be excluded from the state income tax for retirees continuing to live in New Jersey.
Of these issues, retirees should be particularly interested in (1) the elimination of the estate tax, which has been a primary reason that many retirees move out of New Jersey after leaving the work force, and (2) the increase in the amount of retirement income that will be able to be excluded annually from New Jersey state income tax filing.
For many years, the estate tax exclusion in New Jersey has been $675,000, far below the multi-million exclusion found in the federal tax law. (Federal estate tax exclusion in 2017 is $5,900,000) This small State amount has been a prime reason that many retirees leave New Jersey for other more friendly tax jurisdictions. The legislature, in two steps in Chapter 57, eliminated the estate tax completely. First, the exclusion was increased to $2,000,000 for people dying in New Jersey in 2017. Second, the estate tax was completely eliminated for those dying in New Jersey on or after January 1, 2018. This certainly removes one of the major arguments for retirees to move out of New Jersey.
Another item that has encouraged many retirees to leave New Jersey is the imposition of the State income tax on retired income. Although the income tax law has always provided for the exclusion of some retired income from the gross taxable income, just the general notion that the State would tax retired income has soured many retirees and led many to move to other states that do not tax retired income. (New Jersey cannot tax pension income of retirees living outside New Jersey.)
The amount of retirement income that is excluded from New Jersey State income tax has been gradually increasing since 2000. In 2016, the pension amount that may be excluded from gross tax is $20,000 for married filers, $15,000 for single filers and $10,000 for married filers filing separately. Under Chapter 57, these amount will rise each year incrementally until in 2020 married filers will be able to exclude $100,000, single filers will be able to exclude $75,000, and married filers filing separately will be able to exclude $50,000 of retirement income.
There is a catch, however. Under the original State income tax law, “the exclusion ...shall only be allowed if the taxpayer has gross income for the taxable year of not more than $100,000.” If the taxpayer’s gross income exceeds the $100,000, the entire exclusion is lost. So the change in the law is great for some, but not everyone.
It should be noted that the contributions of New Jersey public employees are taxed by the State at the time they are made, i.e. when the employee is actively working. Consequently, when public employees retire, the initial retirement checks are considered to be a return of their original contributions and are not subject to state income tax. This quirk means that the first year to year and a half of pension payments to retirees living in New Jersey are NOT taxed by New Jersey. It is only after the total original pension contribution amount has been “returned” to the retiree through monthly pension checks that the pension checks become subject to New Jersey income tax. As an example, an employee retires after having contributed $70,000 to his/her pension account during the employee’s working career. The retiree’s pension check is $5,000 per month. It takes 14 pension checks to collect the original $70,000. So, the first 14 checks are not taxable income by the State. Check number 15 and all future checks are subject to New Jersey State Income tax, since the original $70,000 contributions have been “returned.”
One last point. New Jersey does not tax pension checks of retirees who live outside New Jersey.