Pensions, annuities, and certain IRA withdrawals are taxable and must be reported on your New Jersey resident income tax return. However, the taxable amount you show on your State return may differ from the amount that is taxable for Federal income tax 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.
Pension, annuity, and IRA income received by a nonresident is not subject to New Jersey income tax.
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" are also taxable.
Social security and railroad retirement benefits, and benefits received as a result of permanent and total disability before age 65, are not taxable and should not be reported as pension income. However, if you retired before age 65 on a total and permanent disability pension, and you continue to receive pension payments after age 65, your disability pension is treated as ordinary pension income beginning the year you reach age 65.
If you are receiving a United States military pension or survivor's benefit payments, the military pension or survivor's benefit is exempt for New Jersey income tax purposes, 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. This exemption does not apply to civil service pensions or annuities, even if the pension or annuity is based on credit for military service. Most military pensions and survivor's benefit payments are received from the US Defense Finance and Accounting Service while a civil service annuity is received through the US Office of Personnel Management.
Retirement plans (pension, annuities, IRAs) fall into two categories, noncontributory and contributory.
If, as an employee, you were not required to pay into or make contributions to your retirement plan while you were working, it is a "noncontributory" plan, and all the amounts you receive from that plan are fully taxable.
If you made contributions to your retirement plan, it is a "contributory" plan. For New Jersey income tax purposes, you will use either the Three-Year Rule Method or the General Rule Method to determine the taxable and excludable parts of any distribution from a contributory plan other than an IRA. When using 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.
When you use the General Rule Method, in the first year, and every year after, part of your pension or annuity payment is taxable, and part can be excluded from your gross income.
For New Jersey purposes, the taxable and excludable amounts of a withdrawal from an IRA (Individual Retirement Account) are calculated differently from the methods used for pensions and annuities. If you need information on IRA withdrawals, view Tax Topic Bulletin GIT-2, IRA Withdrawals.
If you are filing a resident return and you received a distribution from a pension, annuity, or IRA to which you made contributions, you must report both the taxable and excludable portions of the distribution on the separate lines provided for that purpose on Form NJ-1040.
For more information on pensions and annuities, including information on 401(k) plans and lump-sum distributions, view our Tax Topic Bulletin GIT-1, Pensions and Annuities.