If you’ve been living in the Garden State for any length of time, you don’t need to read a magazine to know that you’re being taxed at every turn. Property taxes, state income taxes, even sales taxes are higher than in most other states. Luckily, the state of New Jersey does have some rather unique tax laws in place designed to help retirees. Like many tax laws, this relief comes with some complicated rules that could cost you thousands if you’re not planning carefully.
Retirement Income Exclusion on State Income Tax
The state provides an exclusion where you don’t have to pay state income tax on your pension, annuity, or IRA withdrawals if certain criteria are met. The amount of this retirement income that can be excluded from taxation can be as much as $80,000 for couples in 2019. It goes up to $100,000 in 2020 where it is set to stay. In order to qualify, you must be age 62 or older or disabled and have a gross income of $100,000 or less. Careful consideration should be made as to what defines “gross income” as it’s a different figure than the “Modified Adjusted Gross Income” that the federal government often uses. Your gross or total income includes most sources of income other than NJ nontaxable items such as Social Security benefits, tax free or municipal bond interest received, and federal government bond interest.
The $100,000 threshold is a hard line so depending on your situation, it could be crucial to stay under a gross income of $100,000. Careful planning might be needed as falling just over this threshold could cost you as much as $2,700 more in state income taxes if all your income was retirement income. If you’re close to this $100k threshold, it may make more sense to invest in more municipal or treasury bonds whose interest isn’t included as opposed to taxable bonds whose interest gets added to your gross income. Additionally, you may want to be careful when taking IRA distributions to not push yourself over this threshold. Working with a diligent financial planner and accountant should keep your tax situation in mind as you develop any investment portfolio and retirement income strategy.
Property Tax Relief: Senior Freeze
New Jersey also offers a property tax relief program that is designed to help older NJ residents. The property tax relief is referred to as a “Senior Freeze” on your property tax. The program works as a reimbursement of some of your tax paid. If you do qualify, you would be given a property tax base amount for which you’d still be responsible. You would then pay your regular property taxes when they come due and then the state would reimburse you any amount that exceeds your base that was established.
To qualify, you or your spouse must be at least age 65, or actually receiving Social Security disability payments, and use the property that you’re paying the tax on as your principal residence. Additionally, you must have lived in New Jersey continuously as a renter or home owner for the last 10 years. Moreover, you must have owned and lived in your home that you’re seeking the senior freeze for the last 3 years and paid the full amount of property taxes due on your home. Finally, you have to fall within income limits. Here, however, the state has you include essentially all income, including social security and tax exempt interest. For the past several years this limit has been $70,000. This could be adjusted upward in 2019 to account for inflation although it can be changed back to $70,000 pending the finalization of their budget.
There are a few other details that may disqualify you for this relief. NJ’s treasury website (https://www.state.nj.us/treasury/taxation/questions/senior-freeze.shtml) has an interactive questionnaire that can allow you to see if you may qualify. To apply you would file Form PTR-1 on the Division of Taxation’s website.
Tom Reynolds, CPA & Matt Reynolds CPA, CFP®
Gordon Shearer Jr., CFP®
Francis C. Thomas CPA, PFS
Jeff Hilliard, CFP®, CRPC
Robert T. Martin, CFA, CFP®
(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)
This article was originally published in NJ Lifestyle’s Summer 2019 issue.