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

New Jersey has one of the most favorable pension tax treatments in the country. If you receive a pension from a New Jersey public employee system — police, fire, teachers, state workers — that income is not taxed by the state. If you receive a pension from the federal government, the military, or most private pensions, New Jersey also does not tax it. The main exception is if you are under 60 years old and receiving a pension from a source other than a public employee system; in that case, New Jersey taxes it as ordinary income.

You will still owe federal income tax on your pension, regardless of the source. New Jersey's exemption applies only to state income tax. The federal government taxes all pension income at your ordinary tax rate unless it comes from a Roth account, which has different rules.

Key Takeaways

  • New Jersey does not tax pensions from New Jersey public employee systems, the federal government, or the military, regardless of your age.
  • Private pensions are tax-free in New Jersey only if you are 60 or older; if you are under 60, New Jersey taxes them as ordinary income.
  • Federal income tax still applies to all pensions, even those exempt from New Jersey state tax.
  • You can request that your pension payer withhold state or federal taxes, or you can pay estimated taxes quarterly if you prefer not to have taxes withheld.

Which pensions are completely exempt from New Jersey tax

New Jersey exempts pensions from the Public Employees' Retirement System (PERS), the Teachers' Pension and Annuity Fund (TPAF), the Police and Firemen's Retirement System (PFRS), and the Judicial Retirement System. These are the major public employee plans. If you worked for a New Jersey state agency, a county, a municipality, or a school district and are now receiving a pension from that employer, your pension income is not subject to New Jersey state income tax.

Federal pensions — including those from the U.S. military, the U.S. Postal Service, the Federal Employees Retirement System (FERS), and the Civil Service Retirement System (CSRS) — are also exempt from New Jersey state tax. Railroad retirement benefits are exempt as well. These exemptions apply regardless of your age or when you started receiving the pension.

How New Jersey taxes private pensions based on your age

If your pension comes from a private employer — a corporation, a nonprofit, or a private business — New Jersey's tax treatment depends on your age. If you are 60 or older, your private pension is exempt from New Jersey state income tax. If you are under 60, New Jersey taxes your private pension as ordinary income at the state tax rate that applies to your total income.

The age threshold is 60, not 62 or 65. You do not have to be retired from work; you only have to be receiving pension payments and be at least 60 years old. If you turn 60 during the tax year, you may be able to claim a partial exemption for the months after your birthday, depending on how your pension payer structures the withholding.

Federal tax on all pensions, regardless of state exemption

Even though New Jersey does not tax your pension, the federal government does. All pension income is taxable at the federal level unless it comes from a Roth IRA or a Roth 401(k), which have different rules. Your pension payer should send you a Form 1099-R each January showing the gross amount paid to you in the previous year.

You will report this amount on your federal tax return and pay federal income tax based on your tax bracket. If you have other income — Social Security, investment income, part-time work — your total income determines your federal tax rate. You can ask your pension payer to withhold federal taxes from each payment, or you can pay estimated federal taxes quarterly if you prefer to manage the tax bill yourself.

How to request tax withholding from your pension

When you start receiving your pension, your pension payer will ask you to complete a W-4P form (Withholding Certificate for Pension or Annuity Payments). This form tells the payer how much federal tax to withhold from each payment. You can also request that they withhold state tax, though since most New Jersey pensions are exempt from state tax, this is usually not necessary.

If you did not complete a W-4P when you started receiving your pension, you can contact your pension payer and request one now. You can change your withholding at any time. If you are under-withholding and expect to owe federal tax at the end of the year, you can also make quarterly estimated tax payments directly to the IRS using Form 1040-ES.

What to report on your New Jersey tax return

On your New Jersey state tax return (Form NJ-1040), you will report your pension income on the line for pensions and annuities. However, if your pension is exempt under New Jersey law, you will subtract it out as an exemption so that it does not increase your taxable income. The instructions that come with your tax return form will show you where to claim the exemption.

If you have a private pension and are under 60, you will report the full amount as taxable income. If you are 60 or older, you will report it and then claim the exemption. Keep a copy of your Form 1099-R with your tax records; if the IRS or New Jersey asks questions about your pension income, you will need to show what you reported.

Frequently Asked Questions

Do I have to pay New Jersey tax on my military pension?

No. Military pensions are exempt from New Jersey state income tax regardless of your age or rank. You will owe federal income tax on the amount, but New Jersey will not tax it. Make sure your pension payer knows you are a New Jersey resident so they do not withhold state tax by mistake.

What if I receive a pension from a company that went out of business?

If your pension is paid by a private company or a pension trust, the same age-based rule applies: exempt at 60 and older, taxable if under 60. The source of the pension does not matter, only whether it is from a public employee system, the federal government, or a private employer.

Can I claim a pension exemption if I moved to New Jersey after I started receiving it?

Yes, as long as you are a New Jersey resident when you file your tax return, you can claim the exemption. New Jersey taxes based on residency, not on where the pension originated. If you moved out of New Jersey, you would no longer be able to claim the exemption on your New Jersey return.

Do I need to file a New Jersey tax return if my only income is a tax-exempt pension?

If your only income is a pension that is exempt from New Jersey tax and you have no other income, you generally do not have to file a state return. However, if you have other income — Social Security, investment income, or work income — you may have to file even if the pension itself is exempt. Check the current filing requirements on the New Jersey Division of Taxation website.