We are retiring. Do we qualify for the pension exclusion?

By Karin Price Mueller | NJMoneyHelp.com for NJ.com

Q. My wife and I are planning to retire in July 2022. I’ll be 65 and she will be 62. My wife is a teacher who was told up to a certain time she wouldn’t have to pay state taxes on her pension, but then it would kick in. I rolled my pension lump sum into an annuity. The combined amount will be approximately $48,000 a year. Our combined social security is also $48,000 a year. Will we be eligible for the pension exclusion?

— I can see the light

A. You didn’t mention if you have any investment income, so keep in mind that will count when you calculate whether you’re eligible for the pension exclusion.

Here’s how the exclusion works.

New Jersey allows taxpayers aged 62 or older to exclude pension income from taxation if their income was at or below a certain amount, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

In 2020, pension income was excluded if income was $100,000 or below, he said.

The amount does not include Social Security because benefits are not taxed in New Jersey.

“In 2020, the maximum pension exclusion was $100,000 for married couples, $75,000 for singles and $50,000 for married couples filing separately,” Kiely said. “If your income was $100,001, your pension exclusion was not phased out. It was simply gone.”

But that changed on June 29, 2021, when Gov. Murphy signed a law that provides a limited phase-out of the exclusion for taxpayers with income between $100,000 and $150,000 starting in 2021 and after, Kiely said.

“Under the new law, a taxpayer with gross income of more than $100,000 but not over $125,000 may exclude 50% of the pension and retirement income otherwise allowed,” he said. “A taxpayer with more than $125,000 but not more than $150,000 of gross income can exclude 25% of the amount otherwise allowed.”

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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.