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Tool | August 2013

State-by-State Guide to Taxes on Retirees

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New Jersey

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The Bottom Line
Map of New Jersey

NOT TAX-FRIENDLY

One of Kiplinger's top ten least tax-friendly states for retirees, the Garden State's tax policies create a thicket of thorns for some retirees. The combined state and local tax burden is the second-highest in the nation, and seven of the top ten counties with the highest median real estate taxes are in New Jersey, according to the Tax Foundation. The top income tax rate is 8.97%. However, New Jersey does offer retirees some breaks. It does not tax Social Security benefits or military pensions. Seniors may also qualify for an exclusion of part of their retirement income from state income taxes.

State Sales Tax

7%. Food, prescription and nonprescription drugs, clothing and footwear are exempt. A reduced rate of 3.5% is charged on certain sales occurring in designated Urban Enterprise Zones, such as Newark. Additional taxes and fees are imposed on certain items sold in Atlantic City and Cape May County.

Income Tax Range

Low: 1.4% (on up to $20,000 of taxable income)

High: 8.97% (on taxable income over $500,000)

Social Security

Benefits are not taxed.

Exemptions for Other Retirement Income

Railroad Retirement benefits and military pensions are not taxable. Residents 62 or older may exclude all or part of their taxable pensions, annuities and IRA withdrawals if their gross income for the entire year before subtracting any pension exclusion does not exceed $100,000. The maximum amount excluded depends on your filing status. If married and filing a joint return, you may exclude up to $20,000. If you file as single, head of household, or qualifying widow or widower, you may exclude up to $15,000. If you are married and file a separate return, you may exclude up to $10,000.

Property Taxes

Property taxation is local. Median property tax on the state's median home value of $348,300 is $6,579, according to the Tax Foundation.

The Homestead Benefit Program provides credits against property tax due for homeowners who occupied their principal residence in New Jersey on October 1, paid property taxes on that dwelling and whose gross income for the year does not exceed certain limits.

A Property Tax Deduction/Credit is available to eligible homeowners and tenants who pay property taxes, either directly or through rent, on their principal residence in New Jersey. They are eligible for either a deduction or a refundable credit on their New Jersey resident income tax return. Homeowners and tenants may be eligible for a deduction or credit even if they are not eligible for a homestead rebate. Qualified residents may deduct 100 percent of their property taxes due and paid, or up to $10,000, whichever is less. For tenants, 18% of rent paid during the year is considered property taxes paid.

Tax breaks for seniors: The Property Tax Reimbursement Program, also known as the "senior freeze," reimburses eligible senior citizens for property tax increases. The amount reimbursed is the difference between the amount of property taxes that were due and paid in the first year that the homeowner met all of the eligibility requirements and the amount due and paid in the current year for which the homeowner is claiming the reimbursement, provided the amount paid in the current year is greater. All of the eligibility requirements must be met for the base year and each succeeding year to qualify for the reimbursement. Among the requirements: You must be 65 or older, have lived in New Jersey for at least the past ten years and not have income exceeding certain limits (for 2012, income must be $70,000 or less).

A $250 tax deduction from property taxes is available to a homeowner age 65 or older who is permanently and totally disabled, or the unmarried surviving spouse (55 or older) of such a person. To qualify, annual household income cannot exceed $10,000. This benefit is administered by the local municipality.

There is also a veterans' property tax deduction of up to $250 from taxes due on the real/personal property of qualified war veterans and a full disabled veterans' property tax exemption administered by the local municipality.

Inheritance and
Estate Taxes

New Jersey imposes an inheritance tax, at graduated rates ranging from 11% to 16%, on the transfer from a decedent to certain beneficiaries of real and personal property that has a total value of $500 or more. No tax is imposed on transfers to parents, grandparents, descendants, children and their descendants, spouses, civil union partners, domestic partners or charities. There is a $25,000 exemption per Class C beneficiary (siblings, sons-in-law and daughters-in-law).

New Jersey also imposes a separate estate tax on estates that exceed $675,000 not passing to a spouse or civil union partner. The maximum estate tax rate is 16%. An estate may be subject to the New Jersey estate tax even if there is no New Jersey inheritance tax due. However, any inheritance tax due is taken as a credit against any estate tax.

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