Pension Exclusion Helps Many Retirees When Filing State Income Tax
New Jersey retirees know that their pensions are subject to federal income tax no matter where they live and are subject to New Jersey state income tax if they reside in New Jersey. However, those residing in New Jersey should be aware of a law that was passed several years ago by the Legislature which provides an exclusion of their pension income from New Jersey income tax if the gross yearly income in the household is no more than a $100,000.
The details of that law, as with many laws, require explanation. What constitutes gross income? How much is excludable? Are there age restrictions? Is my spouse’s income included in the $100,000 limit? How does Social Security fit into the calculations?
The question that is raised the most by retirees is “What constitutes gross income?” While the list is long, the major items in reaching the $100,000 limit are pensions; interest; dividends; profits from business; net income from rents; income in excess of your personal contributions to tax sheltered annuity plans, such as 403b and 401k plans (your contributions were taxed when you made them); and any other items that are subjected to the New Jersey Income Tax law.
A second question that is raised relates to retirees filing jointly as part of a household. Here the law does not differentiate between a single taxpayer and a joint household (spouse or civil union). The $100,000 income limit is the same.
What is NOT included is Social Security income, which makes the exclusion a real possibility for many New Jersey retirees. Also not included is interest from obligations issued by the State of New Jersey or any of its political sub-divisions, such as municipal bonds or municipal bond funds; interest from obligations issued by the Federal Government, such as U.S. Savings Bond and U.S. Treasury Bonds, Notes or Bills.
According to the law, any retiree (filing as a single individual or part of a joint household) where the total income as described above is $100,000 or less and is age 62 or older can exclude his/her pension from the New Jersey income tax. (Disability pensions are also excluded for retirees under age 65, but they become regular income and, therefore, become taxable at and after age 65.)
In any situation where the total gross income is $100,001 or more, the exclusion is lost. The final question that is raised is “how much may a retiree exclude?” If a single retiree qualifies (age 62 or older, gross income $100,000 or less), that retiree may exclude $75,000 of pension income in 2021; if a married retired couple files separately, each may exclude $50,000 of pension income in 2021; and if a married couple files jointly, they may exclude a total of $100,000 of their pension income (s) in 2021.
(This column was written to alert retirees of a facet of the New Jersey income tax that may not be known to everyone. It should not be considered professional advice. Anyone considering using the pension exclusion is urged to consult a tax professional before filing.)