New Jersey Retirement Income Exclusions (2024)¶

Quick Reference¶

Pension Exclusion¶

Amount: Up to $100,000 ($150,000 for joint filers) of qualified pension income excluded from NJ tax

Income limits: - Single, MFS, HOH: $100,000 total income - MFJ, QSS: $150,000 total income

Age requirement: 62 or older, OR disabled, OR surviving spouse

Qualifying income: - Private and public pensions - Annuities - IRA distributions (traditional and Roth) - 401(k), 403(b), 457 distributions - Other qualified retirement plan distributions

Fully exempt - All Social Security benefits exempt from NJ tax regardless of income or age.

Military Pensions¶

Service before specific dates: - Certain military pensions fully exempt - Depends on service dates and type of pension

Post-1990 service: - Subject to regular pension exclusion rules

Details¶

Pension Exclusion - Eligibility¶

Who qualifies:

Age 62 or older: - As of December 31 of tax year - Applies to taxpayer or spouse (if MFJ)

Under 62 but disabled: - Permanently and totally disabled - Unable to engage in any substantial gainful activity - Medical documentation may be required

Surviving spouse: - Unremarried surviving spouse of qualified taxpayer - Continues eligibility after spouse's death

Income limits (2024):

Single, MFS, HOH: - Total income must be $100,000 or less - Applies to ALL income (not just retirement income)

MFJ, QSS: - Total income must be $150,000 or less - Combined income of both spouses

Total income defined: - Wages - Business income - Investment income - Pensions and retirement distributions - All other income - Before exclusions

Pension Exclusion - Qualifying Income¶

Types of income that qualify:

Employer pensions: - Private employer pension plans - Public employee pensions (NJ and other states) - Federal employee pensions (CSRS, FERS) - Church and non-profit pensions

IRA distributions: - Traditional IRA - Roth IRA (even though not taxable federally) - SEP IRA - SIMPLE IRA

Qualified retirement plans: - 401(k), 403(b), 457 plans - Profit-sharing plans - Keogh plans - Other qualified plans under IRC

Annuities: - Commercial annuities purchased with after-tax dollars - Qualified annuities from retirement plans

Rollovers: - Distributions from rollovers (IRA to IRA, 401k to IRA, etc.) - Qualify as long as from eligible account

Does NOT qualify:

Non-qualified income: - Social Security (already fully exempt) - Wages and self-employment income - Interest and dividends (even from retirement accounts held in taxable accounts) - Capital gains - Rental income

Pension Exclusion - Amount¶

Maximum exclusion:

Single, MFS, HOH: - Up to $100,000 of qualifying pension income excluded - If pension income exceeds $100,000, excess is taxable

MFJ, QSS: - Up to $150,000 combined excluded - Can allocate between spouses if both have pensions

Example calculations:

Single, age 65, total income $80,000: - Pension income: $50,000 - Wages: $30,000 - Total income: $80,000 (under $100,000 limit) - Pension exclusion: $50,000 (fully excluded) - Taxable income: $30,000 (wages only)

MFJ, both age 67, total income $140,000: - Pensions: $90,000 - Social Security: $40,000 - Interest: $10,000 - Total income: $140,000 (under $150,000 limit, and SS doesn't count) - Pension exclusion: $90,000 - Social Security exclusion: $40,000 - Taxable income: $10,000 (interest only)

Single, age 70, total income $120,000: - Pension: $80,000 - Wages: $40,000 - Total income: $120,000 (over $100,000 limit) - NOT ELIGIBLE for pension exclusion (income too high) - Taxable income: $120,000 (full amount)

Military Pension Exclusion¶

Special rules for military pensions:

Pre-February 12, 1991 service: - Military retirement pay for service before this date fully exempt - No income limit - No age requirement

Post-1990 service: - Subject to regular pension exclusion rules - $100,000/$150,000 limits apply - Age 62 or disability required

Survivor benefits: - Survivor Benefit Plan (SBP) payments to surviving spouse - Treated as military pension - Same rules apply

Disability pensions: - VA disability benefits fully exempt (not taxable for federal or NJ) - Separate from military retirement pay

All Social Security benefits fully exempt:

No conditions: - No age requirement - No income limit - No filing status limitation

Qualifying benefits: - Old-age benefits - Survivor benefits - Disability benefits (SSDI) - Railroad Retirement Tier 1 and Tier 2 benefits (treated same as Social Security)

Federal vs. NJ: - Federal: up to 85% of Social Security may be taxable if income exceeds thresholds - NJ: 100% exempt regardless of income

SSI (Supplemental Security Income): - Not taxable for federal or NJ - Need-based program (different from Social Security)

Other Retirement Income¶

Unemployment compensation: - Fully exempt from NJ tax - Unique to NJ (most states tax it)

Workers' compensation: - Fully exempt (not taxable federally either)

Disability benefits: - Long-term disability insurance benefits generally not taxable if paid with after-tax dollars - Short-term disability may be taxable

Deferred compensation: - Non-qualified deferred compensation generally taxable - Does not qualify for pension exclusion unless from qualified plan

Claiming the Exclusion¶

Form NJ-1040: - Line 19a: Total pension/annuity income (from federal return) - Line 19b: Taxable pension income (after exclusion)

Worksheet: - Instructions for Form NJ-1040 include worksheet - Calculates exclusion amount - Considers income limits and qualifying amounts

Documentation: - Keep copies of 1099-R forms - Document source of pension income - May need to prove age or disability if audited

Automatic: - If eligible and claim on return, exclusion applies - No separate application required

Planning Opportunities¶

Roth conversions: - Roth IRA distributions qualify for pension exclusion - Even though not taxable federally, still use up exclusion amount - Consider impact on NJ taxes

Timing of distributions: - Before age 62: fully taxable - After age 62 (if under income limit): potentially fully excluded - Delay distributions until eligible for exclusion

Income management: - Keep total income under $100,000/$150,000 to qualify - Defer wages or bonuses if close to threshold - Consider Roth conversions in low-income years

Working in retirement: - Wages count toward income limit - May disqualify from pension exclusion if income too high - Balance work income with pension exclusion

Part-time work: - If working part-time with pension income - Watch total income to stay under limit

Common Mistakes¶

Exceeding income limit: - Forgetting that ALL income counts (not just pension) - Wages, interest, dividends, capital gains all included

Claiming exclusion under age 62: - Must be 62 by December 31 of tax year - Turning 62 during year qualifies

Counting Social Security in income limit: - Social Security does NOT count toward income limit - Only count taxable income sources

Applying exclusion to non-qualifying income: - Only qualified retirement distributions excluded - Interest and dividends from IRA balances in taxable accounts do not qualify

Not claiming exclusion: - Eligible taxpayers forget to claim - Results in overpayment of NJ tax

Citations¶

New Jersey Statutes: - N.J.S.A. 54A:6-10 - Pension income exclusion - N.J.S.A. 54A:6-14 - Military pension exclusion - N.J.S.A. 54A:6-1 - Social Security exemption

Regulations: - N.J.A.C. 18:35-6.1 - Pension and annuity income exclusion

NJ Division of Taxation: - Technical Bulletin TB-55 - Pension and Annuity Income - https://www.state.nj.us/treasury/taxation/njit11.shtml - Retirement Income FAQs

Forms: - Form NJ-1040 - Resident Income Tax Return - Instructions for Form NJ-1040 (includes pension exclusion worksheet) - Schedule NJ-PEN - Pension Exclusion Worksheet (if applicable)

IRS Forms (for reference): - Form 1099-R - Distributions from Pensions, Annuities, Retirement Plans - Used to document pension income reported on NJ return

Other: - NJ Division of Taxation - Pension and Retirement Income Information - Instructions and worksheets in annual NJ-1040 instructions booklet