New Jersey for retirees: Social Security untaxed, pensions excluded below $150,000, and the cliff

A retired New Jersey couple with Social Security, a pension and modest IRA withdrawals usually owes the state nothing. Social Security is not a category of New Jersey income and is not reported anywhere on the NJ-1040. Pension and IRA income is a category, but for filers 62 or older with total income of $100,000 or less, the Retirement Income Exclusion removes up to $100,000 of it on a joint return, $75,000 single. The exclusion then falls to 50% of the pension income between $100,001 and $125,000 of total income, to 25% between $125,001 and $150,000, and to nothing at $150,001. That last step is a cliff, not a slope: one extra dollar of income can put an entire pension back on the return, and a Roth conversion, a large IRA withdrawal or a one-time capital gain is the usual cause. Military pensions are exempt in full. What the state taxes in retirement is interest, dividends, gains, rent and wages, at the regular rates, and what it gives back on top of the exclusion is the property tax deduction and the ANCHOR, Senior Freeze and Stay NJ payments.

The Division of Taxation, the Department from here on, confirmed in its 2026 estimated-tax instructions that the exclusion figures, the $1,000 exemption for age 65 and the rate schedules are unchanged for 2026. None of them is indexed.

What is never taxed

Social Security and Railroad Retirement benefits, Tier 1 and Tier 2, are exempt regardless of age or income and do not appear on the return. United States military pensions and survivor benefit payments are exempt and are not reported. So are permanent and total disability benefits including VA payments, life insurance proceeds, and inheritances. None of these count toward the $150,000 total-income test for the pension exclusion either. They do count, as the last section explains, toward the income tests for Senior Freeze and Stay NJ.

Two things that look like military pensions are not. A federal civil service pension from the Office of Personnel Management is taxable, even if part of it rests on military service credit, and so is a New Jersey public pension, subject to the exclusion and to the tax-free return of contributions described next.

What is taxed, and how much of it

Taxable pensions, annuities and IRA withdrawals go on Line 20a of the NJ-1040. The first job is to decide how much of each payment is taxable to New Jersey at all, and the answer is often less than the federal taxable amount, because New Jersey taxed the contributions.

The contributions came back untaxed. Federal law let an employee defer wages into a 403(b), a 457 plan, the Thrift Savings Plan, a SEP or SIMPLE, and into a contributory pension like the state’s PERS or TPAF, and let anyone deduct a traditional IRA contribution. New Jersey excluded none of those from wages; only 401(k) deferrals left Box 16. So a retired teacher, nurse, police officer or state worker has a basis in the plan that the IRS does not recognize. The NJ-1040 instructions give two ways to recover it. Under the Three-Year Rule, if the contributions will be recovered within 36 months of the first payment, every payment is tax-free until they are, then fully taxable. Under the General Rule, a fixed percentage of each payment is excluded for life. For an IRA, the Department’s method is a ratio: the share of the account’s value that was never taxed by New Jersey is the share of each withdrawal that is taxable. The excluded part goes on Line 20b and never enters total income.

Then the exclusion. Whatever is left on Line 20a is reduced by the Retirement Income Exclusion on Line 28a if the filer, or the spouse on a joint return, is 62 or older or disabled under Social Security rules on December 31. The test is total income on Line 27, which is every category of New Jersey income including the pension itself, but not Social Security.

In the first row the exclusion is the lesser of the taxable pension income or the dollar cap. On a joint return where only one spouse is 62, only that spouse’s pension and IRA income can be excluded, though the couple still uses the joint cap.

The other exclusion, Line 28b. A filer 62 or older with total income of $150,000 or less and earned income (wages, business, partnership and S corporation income) of $3,000 or less can use any pension exclusion left over against other income, through Worksheet D. A couple whose pension income is $40,000 has $60,000 of unused joint exclusion, and Worksheet D applies it to their interest, dividends and gains. For a retiree living on a small pension and a large brokerage account, this is the line that brings the tax to zero. A separate Special Exclusion of $6,000 joint or $3,000 single is for the few people who were never eligible for Social Security.

The cliff

Nothing else on the New Jersey return behaves like the $150,000 line. Between $100,000 and $150,000 the exclusion steps down, which is uncomfortable but survivable. At $150,001 it is gone, all of it, and because the exclusion applied to the whole pension, the tax jump can be many times the income that caused it.

Roth conversions

New Jersey follows the federal treatment of Roth IRAs: contributions are not deductible, qualified withdrawals are excluded, and a conversion is taxable in the year of the conversion. The amount taxable to New Jersey is different from the federal amount, though. Only the part of the traditional IRA that New Jersey never taxed is income on conversion: the earnings, and any money rolled in from a 401(k) or other plan that was excluded from wages. Contributions made as a New Jersey resident were taxed when made and come out of the conversion free. Someone who funded an IRA for twenty years from New Jersey wages may find that a third or more of a conversion is already-taxed basis, and the IRA worksheet in Publication GIT-2 keeps the running total.

Whatever part is taxable lands on Line 20a and in total income on Line 27, and that is where the exclusion comes in. A conversion by a retiree at $90,000 of total income that adds $70,000 of taxable conversion pushes Line 27 to $160,000 and eliminates the exclusion on the pension as well as the conversion. The same conversion spread across two years, $35,000 each, keeps Line 27 at $125,000 and preserves half the exclusion each year. The federal side has its own costs, higher Medicare premiums two years later among them, and those are in IRMAA and Roth IRAs and the backdoor Roth. The New Jersey cost is almost entirely about the cliff.

The federal senior deduction, and why it does not reach here

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, is a deduction from federal income. New Jersey does not start from federal income and does not adopt the deduction; the Department’s 2025 update says so directly. What New Jersey gives a senior instead is the extra $1,000 exemption on Line 7 for each filer 65 or older, worth $14 of tax in the bottom bracket and $55 at 5.525%, and the retirement exclusion itself, which for most retirees is worth far more than the federal deduction ever will be.

Property tax relief: three programs and one application

The income tax is small for most retirees. The property tax is not, and the state’s answer is a set of payments run by the Department, not the towns, applied for on a single form. Homeowners 65 or older, or receiving Social Security or Railroad Retirement disability, file Form PAS-1, which covers all three programs at once. Younger homeowners and renters file Form ANC-1 for ANCHOR only. The deadline for the 2025 benefit year is November 2, 2026. Every figure below is the 2025 benefit, paid in 2026 and 2027; the 2026 benefit depends on the budget signed in June 2027 and is to come.

A PAS-1 filer gets the greater of Stay NJ or the Senior Freeze plus ANCHOR combined, capped at the property tax actually paid. Stay NJ’s income limit was $500,000 when the 2025 application opened; the budget signed June 30, 2026 cut it to $200,000 and tiered the maximum before the first payments. Senior Freeze filers use their base-year tax, not the tax paid, for the deduction on the NJ-1040.

The programs count income differently. ANCHOR looks only at Line 29, so a couple whose pension is fully excluded can qualify for the top ANCHOR tier on six figures of actual income. Senior Freeze and Stay NJ count nearly everything: Social Security, the excluded pension, Roth distributions, tax-exempt interest. A retiree managing income around the pension exclusion should check the Senior Freeze limit at the same time; the freeze is lost for any year income goes over it, though the base year can be kept once.

Moving, withholding, estimates

New Jersey does not tax nonresidents on pensions or IRA withdrawals. A retiree who leaves in June reports the first half of the year’s 1099-R on a part-year NJ-1040, with the exclusion prorated by months if total income is $100,000 or less, and nothing after; one who moves in starts reporting on arrival. Details are in Moving to New Jersey.

Pension payers withhold New Jersey tax only if asked, on Form NJ-W-4P, and for most retirees under $100,000 there is no reason to ask. Retirees over the exclusion limits, or with large investment income, owe estimated payments once the tax after withholding exceeds $400; the safe harbor is 80% of this year’s tax or 100% of last year’s, 110% when gross income exceeds $150,000.