Is New Jersey Tax-Friendly for Retirees?

Learn how New Jersey taxes retirement income, Social Security benefits and property taxes. Minimize your tax burden and maximize your retirement savings.

Retiring in the Garden State has many advantages, and state taxation policies have been moving toward accommodating retirees over recent years. Although the state tax rate tops out at 10.75%, that rate, the third highest in the nation, applies only to the highest earners taking in over $1 million a year. When you consider the tax breaks available to retirees, taxation in the state falls, on average, in the middle of all states.

Income Tax on Employment and Investment Income

Income from employment is subject to tax in New Jersey. The state has a progressive income tax system with rates ranging from 1.4% to 10.75%, depending on your income level.

Investment income, which includes dividends, interest and capital gains, is generally taxable in New Jersey. The state does not provide favorable tax rates for capital gains or qualified dividends. Capital gains are taxed at the same rate as other income.

New Jersey does offer some exceptions to taxation of investment income, allowing taxpayers to exclude interest and capital gains from (1) obligations of the State of New Jersey or any of its political subdivisions; or (2) direct federal obligations exempt under law, such as U.S. Savings Bonds and Treasury Bills, Notes and Bonds. In addition, taxpayers are exempt from paying tax on earnings from a 529 college savings account, including the state’s Achieving a Better Life Experience (ABLE) program.

Pension Income/Retirement Distributions

New Jersey’s treatment of pension income is relatively favorable for retirees. Pension income, whether from private sector pensions, 401(k)s, IRAs or public pensions (such as those from the federal government or New Jersey state and local governments), is subject to New Jersey state income tax. However, the state offers an exclusion for pension and retirement income.

If you are 62 years of age or older or disabled and you file a joint return, you may exclude up to $100,000 of pension income from taxable income. The limit for married or civil union (CU) partners filing separately is $50,000. The single or head of household or qualifying widow(er)/surviving CU partner limit is $75,000.

This exclusion decreases if your total income is between $100,001 and $150,000, and no exclusion is available if your total income exceeds $150,000.

Certain taxpayers qualify for the Other Retirement Income Exclusion. Under this exclusion, if you are age 62 or older, other types of income, including wages, interest, and dividends, may also be excluded from your total income under certain circumstances. You can determine whether or not you qualify by completing Worksheet D in the NJ-1040 instructions.

Social Security, Medicare and Health Care Costs

New Jersey does not tax Social Security benefits, regardless of your income level. This is a significant benefit for retirees, as Social Security often accounts for a substantial part of retirement income.

While Medicare premiums are not deductible on your New Jersey state income tax return, medical expenses can be deducted if you itemize and if these expenses exceed 2% of your New Jersey gross income.

Sales and Property Tax

New Jersey’s sales tax is currently set at 6.625%. There are no exemptions for seniors or retirees. Use tax is due on the purchase of a taxable item or service outside the state where sales tax wasn’t paid or was paid at a rate lower than New Jersey’s.

New Jersey has some of the highest property taxes in the nation. However, the state offers several programs to help mitigate this cost for senior citizens.

• Property Tax Reimbursement Program (Senior Freeze): This program reimburses eligible senior citizens and disabled persons for property tax increases on their principal residence (primary home).

• Homestead Benefit (ANCHOR Program): This program provides a tax rebate or a credit if you are a renter. Eligibility and benefit amounts are determined based on your income and filing status.

• Property Tax Deduction/Credit: Senior citizens (age 65 or older) or disabled persons may be eligible for an annual property tax deduction of $250. Additionally, all homeowners may qualify for a property tax credit on their New Jersey income tax return.

Estate Tax

New Jersey repealed its estate tax as of Jan. 1, 2018. This means that estates of individuals who pass away on or after this date are not subject to a state estate tax, regardless of the size of the estate.

It’s important to note that New Jersey still imposes an inheritance tax, which applies to the transfer of assets to certain beneficiaries. Transfers to immediate family members (e.g., spouse, children, parents) are exempt, but transfers to other relatives or non-relatives may be taxed at rates ranging from 11% to 16%.

Taxes for Retirees in New Jersey Have Improved

New Jersey’s tax structure for retirees has improved over recent years. However, proper planning can help in minimizing the burden.

Planning for retirement is no small task, no matter which state you settle in. Having a financial professional in your corner is an asset for all your financial and retirement goals.

Jeffrey Christakos, CPA/PFS, CFP, is a wealth advisor at Christakos Financial in Cranford, NJ. He is also a member of the American Institute of CPA’s (AICPA)’s PFP Champions task force.