Q. I have read about the new exemption on retirement income being phased in next year. The phase-in of the $100,000 exclusion increases at a rate of $20,000 per year, but after the full exclusion kicks in, there appears to be a significant income limitation on using the exclusion beginning in 2021. Can you explain?
— Want to understand

A. On Oct. 14, Gov. Christie signed what’s been talked about as the “gas tax bill,” but the legislation does far more than add a 23-cent gas tax.

Among the changes, the 7 percent New Jersey sales tax will be reduced to 6.875 percent in 2017 and to 6.625 percent in 2018 and beyond, said Abby Rosen, a certified financial planner with RegentAtlantic in Morristown.

She said the state’s estate tax exemption will be increased from $675,000 to $2 million in 2017 and eliminated in 2018. The inheritance tax will still be in place, and this impacts non-lineal heirs.

Additionally, veterans who have been honorably discharged will receive an exemption of $3,000, and the earned income tax credit will increase from 30 to 35 percent, Rosen said.

What does this mean for retired New Jersey residents?

Rosen’s firm has been studying how New Jersey residents have been fleeing to more tax-sensitive statesExodus on the Parkway — and the moves in this bill may keep more retirees here.

So the bad news from the bill is that as of Nov. 1, you’ll pay more for gas.

“On the positive side, if you pass away after 2018, your estate will not be subject to New Jersey estate taxes,” Rosen said. “Currently any estate in New Jersey over $675,000 is subject to estate tax — up to 16 percent).”

She said if you leave your estate to heirs that are not lineal descendants, the inheritance taxwill still apply.

Another positive note, she said, is that you’ll be able exclude more income from your New Jersey tax return.

For starters, she said, the bill increases the pension and retirement income exclusion to $100,000 for joint filers, $75,000 for individuals and $50,000 for those married filing separately.

“New Jersey does not include Social Security benefits in the calculation of income tax, so for retirees 62 and older with less than $100,000 of income, this could be a significant tax savings,” she said. “In a previous version of the bill, taxpayers with income over $100,000 were able to take a percentage of the exclusion, but this stipulation was removed in the latest bill that was signed by Gov. Christie on Oct. 14.”

Rosen said the increase will be phased in over a four-year period starting in 2017.

See the excerpt from the Legislative Fiscal Estimate below:

What is included as NJ income? Wages, interest, dividends bet profits from business, alimony, estate and trust income.

What is excluded from NJ income? Social Security benefits, interest from a NJ municipal bond, military pensions, worker’s compensation and unemployment compensation. For a more complete list of what income is included and excluded from NJ income tax, please see pages 17 and 18 of the NJ-1040 Instructions

If your total income is below $100k in 2020 you may exclude the income attributable to pensions and withdrawals from IRAs, annuities and 401(k)s. Currently, if you do not use your entire NJ pension exclusion ($20k for joint filers) you may use your unused pension exclusion toward other income like interest and dividends. You must not have more than $3000 of income from wages, net profits from business, distributive share of partnership income, and/or net pro rata share of S corporation to be eligible for the Other Retirement Income Exclusion (ORIE). Please see below for examples provided by the state’s tax bulletin.

John and Linda Harris are both 63 years old and file a joint return. Their combined total income is $36,000 for the tax year. Their combined tax able pension income totals $22,000.
Actual Taxable Pension Income……….$22,000
Applicable Pension Exclusion ………… $20,000

Ryan and Emma Sanderson are both age 67 and file a joint return. They have a combined total income of $110,450 for the tax year, including taxable pension income of $79,000.
Actual Taxable Pension Income……….$79,000
Applicable Pension Exclusion …………$ 0
The Sandersons are not eligible for a pension exclusion this year because their combined total income for the entire year is more than $100,000.

Ann and Jim Anderson are both 63 years old and file a joint return. Their combined total in come was $75,000 for the tax year. They do not have any pension income. The Andersons’ joint income from wages, net profits from business, distributive share of partnership income, and net pro rata share of S corporation income totals $1,872. They qualify for Part I of the other retirement income exclusion.
Maximum Pension Exclusion ………….$20,000
Less: Pension Exclusion claimed……..$ 0
Unused Pension Exclusion………………$20,000
ORIE Part I …………………………………… $20,000

Rosen said though the gas tax increase is a hard pill to swallow for drivers, retirees should look positively at the increase in retirement income exemption and the repeal of the estate tax. Both could mean major tax savings for retirees, which hopefully means more people will be willing to spend their retirement in our great state, she said.

Email your questions to ask@njmoneyhelp.com.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter

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