NJ Income Tax – Retirement Income
If you are a New Jersey resident, your pensions, annuities, and certain IRA withdrawals are taxable and must be reported on your New Jersey tax return. However, the taxable amount you report for federal tax purposes may not be the same as the amount you report for New Jersey purposes. This is because you may have to calculate the taxable amount for your New Jersey return differently than you do for your federal return.
Note: If you are a nonresident, your pension, annuity, and IRA income is not subject to New Jersey Income Tax.
Nontaxable Retirement Income
The following benefits are not taxable and should not be reported as pension income:
Social Security and Railroad Retirement benefits;
Pension payments received because of permanent and total disability before age 65. However, the year you reach age 65, your disability pension is treated as ordinary pension income and must be reported;
Military pensions and survivor’s benefit payments, regardless of your age or disability status. Military pensions are those resulting from service in the Army, Navy, Air Force, Marine Corps, or Coast Guard. However, civil service pensions and annuities are taxable, even if they are based on credit for military service. Most military pensions and survivor’s benefit payments are received from the U.S. Defense Finance and Accounting Service, while a civil service annuity is received through the U.S. Office of Personnel Management.
Taxable Retirement Income
Taxable pensions include all state and local government, teachers', and federal pensions, as well as employee pensions and annuities from the private sector and Keogh plans. Amounts received as "early retirement benefits" and amounts reported as pension on Schedule NJK-1, Partnership Return Form NJ-1065, are also taxable. However, if you (and/or your spouse/civil union partner if filing jointly) were 62 or older or disabled, you may be able to use the retirement exclusions to reduce your taxable income.
Retirement plans are either noncontributory or contributory. The amounts you report depend on the type of plan you have.
Note: Withdrawals from an IRA (Individual Retirement Account) are calculated differently than pensions and annuities.
If you were not required to contribute to your retirement plan while you were working, it is a noncontributory plan. All the amounts you receive from that plan are fully taxable.
Contributory Plans (Other Than IRAs)
If you were required to contribute to your retirement plan, it is a contributory plan. Contributions are usually made through payroll deductions, and, in general, have already been taxed. Your contributions are not taxed when withdrawn. However, any employer contributions and earnings that have not been taxed must be reported.
You will need to determine the taxable and excludable parts of your distribution. There are two methods you can use to calculate these amounts: Three-Year Rule Method and General Rule Method. If you use the Three-year Rule Method, your pension is not reported as taxable income until the payments you receive from the plan equal the amount you contributed. Once you have received an amount equal to your contributions, all payments from the pension plan are fully taxable. If you use the General Rule Method, part of your pension or annuity payment is taxable and part is excluded from your income every year. If you are filing a resident return, you must report both the taxable and excludable portions of your distribution on the separate lines provided for that purpose on Form NJ-1040.