by Evan Wesley
New Jersey residents of retirement age just got some good news! Beginning in this tax year (2021), the income limit for a Retirement Income Exclusion has increased to $150,000 (a $50,000 increase from the 2020 level). You may not be required to pay as much tax as you think! Continue reading to find out more about the eligibility requirements and then maybe you will think twice about leaving New Jersey to retire.
If you (and/or your spouse, if filing jointly) are 62 and older or disabled on December 31, and your total income for the entire year was $150,000 or less, you can exclude all or part of the pension, IRA or 401(k) income you received during the year. If you file a joint return and only one of you is 62 or older or disabled, you can still claim the maximum pension exclusion, but you can only exclude the pension, annuity, or IRA withdrawal of the qualified spouse.
SOME DATAPOINTS
If you are eligible, you are able to claim the lesser of your actual taxable retirement income or the maximum pension exclusion amount for your filing status and gross income. See below:
- If your total income is $100,000 or less, you can exclude up to $100,000 of your taxable pension, annuity and/or IRA withdrawals if married filing jointly, $50,000 if married filing separately, and $75,000 if filing single, head of household, or qualifying widow(er).
- If your total income is between $100,000 and $150,000, you can exclude a percentage of your taxable pension, annuity and/or IRA withdrawals as follows:
- If your total income is $100,001 – $125,000, you can exclude 50% of your taxable retirement income if married filing jointly, 25% if married filing separately, and 37.5% if filing single/head of household/qualifying widow(er).
- If your total income is $125,001 – $150,000, you can exclude 25% of your taxable retirement income if married filing jointly, 12.5% if married filing separately, and 18.75% if filing single/head of household/qualifying widow(er).
If your retirement income is less than the threshold amount, you may be able to use the remainder of your retirement/pension exclusion to offset other income (i.e., wages, business and certain investment income).
CONSIDER THIS
Many people believe that living in New Jersey, even in retirement, is very expensive. While this may be true in some instances, it can actually be very affordable if you are eligible to take advantage of the pension exclusions and benefits New Jersey has to offer. In addition, it’s important to note that Social Security benefits are not taxable in New Jersey, nor do they contribute to the retirement income threshold amount. You should certainly consider the tax benefits of retiring in New Jersey when deciding where you are going to spend your golden years!
By the way, if you plan on leaving New Jersey, you should be aware of the so-called “NJ Exit Tax.” When N.J. residents sell their homes and prepare to move out of state, they must pay an estimate of the standard tax rate on the profit from the sale, which is the greater of 8.97% of the profit or 2% of the selling price. You need to make this payment when you move, rather than at the time you would normally file your state income tax return. Because of the timing of the state tax requirement, this policy has been thought of as an “exit tax” because it is paid upon “exiting” the state.
Many residents who are relocating believe they are paying an additional “exit” tax on the sale of their homes as they move out of state. Instead, in reality, it is a prepayment of state taxes that may be owed on the profit from the sale. If the prepayment is too high, you will receive a tax refund when you file that year’s N.J. income tax return.
If you have any questions or would like to learn more about the retirement income exclusions New Jersey has to offer or the “N.J. Exit Tax,” feel free to contact us. Thank you and happy retirement!