By Christina Hernandez Sherwood
When Ed McFadden, 66, retired from his job as director of operations for an outsourcing company in October 2015, he and his wife moved from Pennsylvania to New Jersey’s Sea Isle City.
Their decision to make the Garden State their retirement home isn’t typical. With its high taxes and housing costs, the state is traditionally seen as one of the worst for retirees.
But a tax change strongly supported by AARP New Jersey and signed into law last year aims to ease the burden for retirees by increasing the amount of retirement income excluded from state income tax. McFadden, who receives a pension, estimated the change will eventually save him $200 to $300 each year.
When the tax cut is completely phased in, the average retiree will save from $500 to $900 a year, according to state Senate President Steve Sweeney’s office.
“It’ll make it nicer for people who want to retire in New Jersey,” McFadden said. “Every little bit helps at this point.”
Through 2016, retirement income for New Jersey residents 62 and older—including 401(k)s, annuities, pensions and IRAs, but not Social Security—was taxed as regular income after the first $15,000 for individuals, $20,000 for married couples filing jointly and $10,000 for married couples filing separately.
But starting with 2017 income, the new law will increase the amount of retirement income required before taxes kick in for residents 62 and older.
For individuals, the threshold will increase to $30,000 in 2017, $45,000 in 2018, $60,000 in 2019 and $75,000 in 2020.
For married couples filing jointly, it will increase to $40,000 in 2017, $60,000 in 2018, $80,000 in 2019 and $100,000 in 2020.
For married couples filing separately, it will increase to $20,000 in 2017, $30,000 in 2018, $40,000 in 2019 and $50,000 in 2020.
The full state income tax will be levied for retirement income above those thresholds.
The tax on retirement income is one reason retirees have found the Garden State unattractive. Last year, Kiplinger’s Personal Finance named New Jersey one of the least tax-friendly states for retirees, noting its high state and local taxes.
“There’s always talk about wealth leaving the state,” said Sweeney (D-West Deptford), a long-time proponent of the tax cut. “The wealth that’s leaving is really the seniors taking their nest eggs to other states because we’re taxing their retirement income.”
‘Very significant relief'
The change is “very significant tax relief,” said C. Brian McGuire, AARP New Jersey advocacy director. “It will help retirees afford to stay in New Jersey and put hundreds of dollars in the pockets of middle-class retirees struggling with tight budgets.”
The legislation included a package of other tax changes that are going into effect this year. The retirement income tax cut could amount to $80 million to $120 million by 2021, according to a legislative analysis.
Lilyan Cralle, 76, a retired actuarial analyst from Willingboro, said the tax change means she might not have to file a state return.
“I’ll pay less state income tax, and eventually I think I’ll pay none,” she said. “It’s a recognition that we’re senior citizens and we’re making do on what we have, and it’s an expensive state.”
Christina Hernandez Sherwood is a writer living in Collingswood, N.J.
A Tax Break on Retiree Income
By George Bridges , March 01, 2017 12:01 AM
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