What Percentage Does NJ Tax Pensions?

New Jersey taxes income from pensions and other retirement sources, but it provides a tax deduction called the Pension Exclusion. This exclusion can lower the amount of retirement income subject to state tax for many retirees. Understanding who qualifies for this benefit is a primary step in determining your tax liability, as the rules are tied to specific age, disability, and income criteria.

Eligibility for the Pension Exclusion

To qualify for New Jersey’s Pension Exclusion, a taxpayer must satisfy conditions related to age or disability, filing status, and total income. The primary requirement is that the taxpayer, or their spouse on a joint return, must be 62 years of age or older by the last day of the tax year. Alternatively, an individual of any age who is classified as disabled according to Social Security guidelines also meets this test. If only one spouse on a joint return meets the age or disability requirement, the exclusion only applies to the pension income of the qualifying spouse.

The second condition relates to the taxpayer’s filing status, which includes Married Filing Jointly, Single, Head of Household, and Married Filing Separately. The final and most definitive requirement is the income limitation. To be eligible for any pension exclusion, a taxpayer’s total income for the year must not exceed $150,000. This income figure is comprehensive, including not just the pension itself but also wages, interest, dividends, and capital gains.

This income ceiling acts as a strict cutoff, meaning even a small amount over the limit results in a complete loss of the exclusion. It is important for retirees to accurately calculate their total income from all sources to determine if they fall under this cap.

Calculating Your Taxable Pension Income

The amount of pension income that can be excluded from state taxes depends on the taxpayer’s filing status and total income level. For those with a total income of $100,000 or less, a married couple filing a joint return can exclude up to $100,000 of their pension income. An individual filing as Single or Head of Household can exclude up to $75,000, and a person who is Married Filing Separately has a maximum exclusion of $50,000.

A taxpayer claims the lesser of their actual pension income received or the maximum exclusion amount for their filing status. For instance, if a single individual receives $60,000 in pension income and has a total income under the $100,000 threshold, they can exclude the entire $60,000 because it is less than their $75,000 maximum. If that same individual received $85,000 in pension income, they would be limited to excluding the maximum of $75,000, leaving $10,000 of their pension as taxable income.

For taxpayers with total income between $100,001 and $150,000, the exclusion is reduced. Instead of a fixed dollar amount, they can exclude a percentage of their pension income based on their specific income level. This phase-out ensures that the benefit is gradually eliminated as income rises toward the $150,000 cutoff.

The reduction is applied in two tiers. For those with income from $100,001 to $125,000, a married couple filing jointly can exclude 50% of their pension income, while a single filer can exclude 37.5%. For those with income in the next bracket, from $125,001 to $150,000, the exclusion drops to 25% for joint filers and 18.75% for single filers. The result of this calculation is the “taxable pension income.”

Applying New Jersey Income Tax Rates

The percentage of tax paid on a pension in New Jersey is not a single, flat rate. Instead, the taxable portion of the pension is combined with all other sources of taxable income, such as wages, interest, and other earnings. This total taxable income is then subjected to New Jersey’s progressive income tax brackets. These rates range from 1.4% on the lowest income amounts to 10.75% on income exceeding $1 million.

To illustrate, consider a married couple filing jointly with a total taxable income of $90,000, which includes their taxable pension amount. The income is taxed at the following rates:

• The first $20,000 of their income is taxed at 1.4%.
• Income between $20,001 and $50,000 is taxed at 1.75%.
• The next bracket, from $50,001 to $70,000, is taxed at 2.45%.
• Income from $70,001 to $80,000 is taxed at 3.5%.
• The final portion of their income, from $80,001 to $90,000, is taxed at 5.525%.

The final tax liability is the sum of the taxes calculated at each of these bracket levels.

This structure ensures that the tax rate applied to pension income is dependent on the retiree’s overall financial picture. A retiree with significant other income will find their taxable pension dollars being taxed at a higher marginal rate than a retiree whose pension is their primary source of income. The specific tax percentage is therefore not on the pension itself, but on where the total income falls within the state’s graduated tax tables.