New Jersey Extends Retirement Income Exclusion
The State of New Jersey, recently reduced many retirees’ income taxes by extending a limited pension and retirement income exclusion to taxpayers with gross income exceeding $100,000 but not more than $150,000.
New Jersey does not tax Social Security benefits or military pensions. Since 2000, New Jersey has provided taxpayers a pension and retirement income exclusion. The retirement exclusion allows qualifying New Jersey retirees to avoid state income tax on a portion of their retirement income.
The Retirement Income Exclusion has increased over the years. In 2020, the maximum exclusion amount was $100,000 for joint filers, $75,000 for single individuals and $50,000 for married taxpayers filing separately.
The current exclusion is available to a taxpayer 62 years of age or older or who is eligible for disability payments under the federal Social Security Act but only if the taxpayer’s gross income did not exceed $100,000. This rule created a gross income “cliff” meaning a taxpayer with gross income of $100,000 could be eligible for the income exclusion amount. A taxpayer with gross income $100,001 or more lost the entire exclusion.
On June 29, 2021, Governor Murphy signed P.L. 2021, c.129 (5539) which provides a limited phaseout of the exclusion for taxpayers with income between $100,000 and $150,000. The enhanced exclusion is effective for taxable years beginning on or after January 1, 2021.
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. A taxpayer with more than $125,000 but not more than $150,000 of gross income to exclude 25% of the amount otherwise allowed. The cliff effect remains, however. A taxpayer with gross income $150,001 or more will lose their entire exclusion.
The exclusion first applies to pension income. If a taxpayer cannot use their maximum pension exclusion amount and if their earned income from wages proprietorships, partnerships, and S corporations total $3,000 or less, the unclaimed pension exclusion can be used to exclude from taxable income other types of income (wages, interest, dividends, etc.). A special exclusion is also available to taxpayers who cannot receive Social Security or Railroad Retirement benefits.
A part-year resident must prorate the pension exclusion amount by the number of months spent as a New Jersey resident taxpayer.