New Jersey Retirement Tax Friendliness

New Jersey Retirement Taxes

Considering a Garden State retirement? Depending on your financial situation, New Jersey’s tax system could be good for you – or it could be terrible for you.

The state has the highest property taxes of any state in the U.S. Homeowners in New Jersey on average pay $8,796 a year in property taxes. This means that even for seniors who have paid off their mortgage, homeownership can be a costly proposition.

On the other hand, New Jersey’s income tax system is relatively friendly for retirees. The state provides for a significant deduction for retirees with low to moderately-high earnings. Income tax rates are low for most earners, although retirees with very high earnings could pay some of the highest rates in the country.

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How tax-friendly is New Jersey for retirees?

This depends on your level of income and assets, so we’ll say moderately friendly. Social Security is not taxed at the state level in New Jersey, and state income taxes will be low for most retirees with income from retirement accounts and pensions below $75,000.

Property taxes in New Jersey are more expensive than in any other state at 2.47%, so retirees who own a New Jersey home could find themselves paying an arm and a leg. Sales taxes are moderate at less than 6.625%.

Is Social Security taxable in New Jersey?

The state of New Jersey does not tax Social Security benefits, although retirees living in New Jersey may still have to pay federal taxes on Social Security.

Are other forms of retirement income taxable in New Jersey?

Yes, they are, but New Jersey provides a large deduction on retirement income for persons age 62 and older. Anyone at that age level with a federal adjusted gross income (AGI) of $150,000 or less can deduct up to $75,000 (single filers), $100,000 (joint filers) or $50,000 (married people filing separately) in income from public or private pensions or retirement accounts, like a 401(k) or IRA. 

Those with an AGI between $100,001 and $150,000 can exclude up to a percentage. Pension exclusions for income between $100,001 and $125,000 are 37.5% (singles), 50% (married, filing jointly) and 25% (married, filing separately). And for filers between $125,001 and $150,000, percentages are 25% (singles), 18.75% (married, filing jointly) and 12.5% (married, filing separately).

How high are property taxes in New Jersey?

New Jersey’s property taxes are the highest in the U.S. The median property tax paid is $8,785. This is several times higher than the U.S. median.

Housing costs in New Jersey are generally higher than elsewhere in the country as well. For example, the median home value in Jersey is $355,700. Even with the state's homestead rebate, property taxes in New Jersey can be onerous.

What is the New Jersey homestead exemption?

The New Jersey homestead rebate is a property tax benefit available to New Jersey homeowners who are at least 65 years old. The rebate is based on your income and the property taxes you have paid in prior years. For example, the rebate paid to seniors in 2019 is based on 2017 gross income and 2006 property taxes. The program was frozen in May 2020 in the midst of the COVID-19 pandemic and then restored in Oct. 2020. The 2021 property tax credits were based on income and property taxes paid for tax year 2017.

If your 2017 New Jersey gross income was $100,000 or less, the benefit is equal to 10% of your 2006 property taxes up to a maximum of $10,000. If your 2017 New Jersey gross income was between $100,000 and $150,000, the benefit is equal to 5% of your 2006 property taxes up to $10,000. Homeowners with 2017 gross income above $150,000 are ineligible for this program.

How high are sales taxes in New Jersey?

Sales taxes in New Jersey are close to the average among all U.S. states. The statewide rate is 6.625%. Local governments do not collect their own sales taxes. However, there are two exceptions. First, there are New Jersey’s “Urban Enterprise Zones,” where purchases made at qualified businesses (typically retailers) face a reduced sales tax rate of 3.3125%. As of May 30, 2018, there are 37 Urban Enterprise Zones in New Jersey, including parts of Newark, Trenton, Camden and more. The other exception to New Jersey’s state sales tax is Salem County. In Salem County, nearly all purchases are also subject to a reduced sales tax rate of 3.3125%. The only items that do not get that reduced rate are alcoholic beverages, cigarettes, motor vehicles, services and any transactions made from outside the county.

There are also some key exemptions for items that are especially important to seniors. Medicine (prescription and non-prescription), groceries and many types of clothing are all exempt from sales tax in New Jersey.

What other New Jersey taxes should I be concerned about?

If you are planning on passing savings or other assets on to your loved ones, you should be aware of New Jersey’s inheritance tax. Bequests passed on to non-relatives, siblings and distant relatives are taxed at rates ranging from 11% to 16%, with the first $25,000 being exempt.

New Jersey does not have an estate tax as of January 1, 2018. Prior to that date, New Jersey did have one. For any deaths in 2017, the estate tax exemption was $2 million, and with tax rates up to 16%.