New Jersey does not tax most pension income, but the rules depend on when you earned it and what type of pension you receive

New Jersey exempts most pension income from state income tax. If you receive a pension from a New Jersey public employee system (NJPERS, TPAF, PFRS, DCRP), a federal pension, a military pension, or a pension from most private employers, you will not owe New Jersey state tax on that money. The exemption applies regardless of your age or income level.

The main exception is pensions earned before 1992 from certain sources. If you worked for a New Jersey employer and earned pension credits before January 1, 1992, some or all of that pension may be taxable. This rule affects relatively few people, but it matters if you have a long work history in New Jersey or if you left a job decades ago and are now collecting an old pension.

Federal income tax is separate from state tax. Even though New Jersey does not tax your pension, the federal government may. Most pensions are subject to federal tax, and you may owe federal income tax on your pension payments. Military pensions have different federal rules, and some military retirees may not owe federal tax on the full amount.

Key Takeaways

  • New Jersey exempts pensions from state income tax for most retirees, including public employees, military retirees, and private pension recipients.
  • Pensions earned before January 1, 1992 from certain New Jersey employers may be partially or fully taxable under state law.
  • Federal income tax still applies to most pensions even though New Jersey does not tax them, so you may owe money to the IRS.
  • You do not need to file a New Jersey state return if your only income is a pension, unless you have other income that requires filing.

Which pensions are exempt from New Jersey tax

New Jersey law exempts the following pensions from state income tax: pensions from the New Jersey Public Employees' Retirement System (NJPERS), the Teachers' Pension and Annuity Fund (TPAF), the Police and Firemen's Retirement System (PFRS), the Defined Contribution Retirement Program (DCRP), and the Judicial Retirement System. If you worked for a New Jersey city, county, school district, or state agency and are now collecting a pension, your pension is not taxed by New Jersey.

Federal pensions are also exempt. This includes pensions from the Civil Service Retirement System (CSRS), the Federal Employees Retirement System (FERS), and other federal employee pension programs. Military pensions from the Department of Defense are exempt as well.

Private employer pensions are exempt. If you worked for a private company and receive a pension from that employer's plan, New Jersey does not tax it. This includes pensions from corporations, nonprofits, unions, and other private sources.

Railroad pensions paid by the Railroad Retirement Board are exempt from New Jersey tax. Veterans' benefits and disability pensions are also exempt.

The pre-1992 pension rule and who it affects

If you earned pension credits before January 1, 1992 from a New Jersey employer, part or all of your pension may be taxable under New Jersey law. This rule applies only to pensions earned before that date. Any pension credits you earned on or after January 1, 1992 are exempt, even if you work for the same employer.

This rule most often affects people who worked for a New Jersey employer for many years, left the job before 1992, and are now collecting a pension. It can also affect people who worked part-time or in multiple jobs and have small pensions from employers in New Jersey.

To determine whether your pension is taxable under this rule, you need to know the date you earned each portion of your pension. Your pension provider (the company or agency paying you) can tell you what portion of your pension was earned before 1992 and what portion was earned after. Ask them for a breakdown by year or by the date the pension credits were earned.

If you have a pre-1992 pension, you will report it on your New Jersey state tax return. The amount taxed depends on your total income and other factors. You may owe tax on part of the pension, all of it, or none of it, depending on your specific situation and income level.

Federal income tax on pensions

The federal government taxes most pension income. Even though New Jersey does not tax your pension, you will likely owe federal income tax on it. The amount depends on your total income, your filing status, and your age.

When you start receiving pension payments, your pension provider will ask you to fill out a federal withholding form (Form W-4P). This form tells the pension provider how much federal tax to withhold from each payment. If you do not withhold enough, you may owe money when you file your federal tax return. If you withhold too much, you will receive a refund.

Military pensions have a special federal tax rule. If you are a military retiree and you were on active duty before January 1, 1994, you may not owe federal tax on the full amount of your pension. You should speak with a tax professional or contact the IRS to determine your specific situation.

When you need to file a New Jersey tax return

If your only income is a pension and you do not have other income, you generally do not need to file a New Jersey state tax return. New Jersey does not tax pension income, so there is no state tax to report or pay.

You do need to file a New Jersey return if you have other income in addition to your pension. This includes wages from a job, self-employment income, rental income, investment income, or income from a business. You also need to file if you are required to file a federal return, even if you do not owe New Jersey tax.

Even if you do not need to file, you may want to file anyway if you had taxes withheld from your pension or other income. Filing allows you to claim a refund of any overpayment.

How to report pension income on your New Jersey tax return

If you have a pre-1992 pension that is taxable, you will report it on your New Jersey state tax return using Form NJ-1040 or Form NJ-1040-SR (for seniors). The taxable portion of your pension goes on the income section of the return.

Your pension provider will send you a Form 1099-R each year showing the total amount of pension payments you received. This form also shows any federal tax withheld. Keep this form with your tax records. You will use the information on the 1099-R to complete your New Jersey return.

If you are unsure whether your pension is taxable or how much to report, contact the New Jersey Division of Taxation or speak with a tax professional. The Division of Taxation can answer questions about which pensions are taxable and how to report them.

Frequently Asked Questions

Do I owe New Jersey tax on my military pension?

No. Military pensions are exempt from New Jersey state income tax. However, you may still owe federal income tax on your military pension unless you may have access to for a special federal exemption. Military retirees who were on active duty before January 1, 1994 may have different federal tax rules, so check with the IRS or a tax professional about your specific situation.

What if I worked in New Jersey for 30 years and retired in 1990?

Your entire pension is likely taxable under New Jersey law because you earned all your pension credits before January 1, 1992. Contact your pension provider and ask for a breakdown of when your pension credits were earned. You will report the taxable amount on your New Jersey state tax return. You may also owe federal income tax on this pension.

I have a pension from a private company. Do I owe New Jersey tax on it?

No. Private employer pensions are exempt from New Jersey state income tax, regardless of when you earned them or how much the pension is. You may still owe federal income tax on the pension, so check your federal withholding.

Can I avoid federal tax on my pension?

Most pensions are subject to federal income tax, and you cannot avoid it. However, you can control how much tax is withheld from each payment by filling out Form W-4P with your pension provider. If you do not want tax withheld, you can request that, but you will then owe the tax when you file your federal return. Military retirees may have special federal tax rules; contact the IRS for details.

Where do I learn about my pre-1992 pension is taxable?

Contact your pension provider directly and ask for a breakdown of your pension by the date earned. They can tell you what portion was earned before January 1, 1992. You can also contact the New Jersey Division of Taxation with details about your pension, and they can tell you whether it is taxable under state law.