New Jersey is historically one of the most expensive places to live in the United States.
In an effort to stop retirees from leaving the state, starting in 2017, the state raised the amount of retirement income that could be excluded from state taxes for those age 62 and older, giving more residents a tax bill of zero.
But the policy wasn’t without criticism.
If taxpayers earned more than $100,000 — even by a mere $1 — they wouldn’t get the benefit at all.
That’s set to change under a bill that’s before the Senate Budget and Appropriations Committee Tuesday and is part of the state’s massive new budget deal.
Under the bill, taxpayers who earn between $100,000 and $150,000 will receive a partial exclusion, rather than be cut off entirely, starting with the 2021 tax year. That will affect nearly 70,000 taxpayers, the state said.
Married couples who file a joint tax return and have gross income of between $100,000 and $125,000 would be able to exclude 50% of their payments from income. Married couples who earn a higher amount, between $125,000 and $150,000, would be able to exclude 25% of payments.
Those who are married but file separate tax returns and earn between $100,000 and $125,000 would exclude 25% of their payments from taxes, while those who earn between $125,000 and $150,000 would exclude 12.5%.
And single taxpayers would exclude 37.5% of payments if they earn between $100,000 and $125,000, while singles who earn between $125,000 and $150,000 would exclude 18.75% of payments.
That’s an expansion of the current law, which allowed married couples to exclude up to $100,000 of gross income on certain retirement distributions, while singles could exclude $75,000 and those married filing separate tax returns could exclude $50,000.
For example, a married couple who had income of $110,000 in 2020 wouldn’t have received any exclusion. But under the new measure, that same couple could exclude $55,000 of income in 2021.
The benefit is also available to taxpayers who are eligible for Social Security benefits because of a disability. And if you’re married and only one of you is 62 or older or disabled, you can still claim the maximum pension exclusion amount but you can only exclude the retirement income of the spouse who is 62 or older or disabled, the state said.
Senate Republican Budget Officer Steven Oroho proposed the phase-out when the pension exclusion was first negotiated, but it didn’t make the final bill.
“I’ve been advocating for changes to the pension exclusion for years to eliminate the huge tax hit on New Jersey retirees when they surpass $100,000 in income,” he said. “I’m glad the reform we have long proposed is finally advancing.”
But Clare Wherley, a certified public accountant and certified financial planner with Peapack Private Wealth Management, said that while any expansion is welcome, she doesn’t think it will have a significant effect on retirees’ decisions to stay in New Jersey or leave.
“Moving to a sliding scale rather than a cliff is an improvement but there are too many other factors that are important in considering a move,” she said. “Cost of living overall and property taxes are bigger factors and non-monetary considerations like family or weather may have greater impact on the ultimate decision.”
Here is a list of what income can be excluded:
• Individual Retirement Arrangements (IRAs)
• Simplified Employee Pensions (SEPs)
• Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plans
• Profit Sharing Plans
• Defined Benefit Plans
• Section 457 Plans
• Employee pensions if not included above
Military pensions are not reportable, but civil service pensions are.
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Karin Price Mueller may be reached at KPriceMueller@NJAdvanceMedia.com.
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