Are you currently or soon-to-be retired? Do you live in New Jersey? If you answered yes to those questions, you should benefit from a New Jersey tax break. As many people know, New Jersey residents are one of most highly taxed in the US. A study by the Tax Foundation showed that New Jersey is ranked as the third highest tax burden amongst all the states. Luckily, lawmakers are taking some steps to ease the tax burden of living in the State.
When people retire, they generally draw down on funds saved over the years spent working. In some cases, their employer may have set up some sort of retirement plan that allowed the worker to put away some money specifically for retirement. When those funds are distributed to retired workers they generally must pay income taxes on those amounts. For federal tax purposes, if a retired worker took a distribution from a 401(k) for $100,000 then he or she would have to pay tax on the full $100,000. Most states tax retirement plan distributions the same way as the federal government, but some states offer tax breaks specifically for retirement income. New Jersey is one of those states.
New Jersey tax law specifically provides an exclusion to taxpayer receiving qualifying retirement income, meaning that the state will not tax this income. Retirement income that qualifies for this exclusion includes pensions, annuities, and IRA withdrawals. Under previous state law, New Jersey allowed taxpayer to exclude up to $20,000 of qualifying income. In 2016, however, the law was changed to increase the exclusion to a maximum of $100,000. That amount will be phased in over four years. The maximum exclusion amounts set as follows during the phase in period: $40,000 in 2017; $60,000 in 2018; $80,000 in 2019; and $100,000 in 2020.
As long as the income qualifies for the exclusion, taxpayers will be able to avoid tax on up to $100,000 after 2019. That is a huge tax break for retirees by itself, but the State offers an additional tax break for those taxpayers that qualify for the exclusion but cannot use the full amount. For instance, if qualifying retirement income is only $60,000 a taxpayer could potentially use the remaining $40,000 to offset other types of taxable income like wages, interest, dividends, etc. Certain conditions must be met to qualify for this exclusion, so not everyone will be eligible for this tax break.
If you collect retirement income in New Jersey you should be aware of this tax break. Ask your Alloy Silverstein CPA if can take advantage of it by giving us a call at 856-667-4100.
Associate Partner
Ren III provides tax, accounting, and advisory services to a broad range of clients, with a specialty for manufacturers, title insurance companies, and professional service providers.
View Ren III's Bio → Follow @R3CPA on Twitter →
