State Retirement Planning Considerations: New Jersey vs. Pennsylvania

Individuals approaching retirement often ask about tax withholding and how different states treat retirement income. Since many of my clients live in New Jersey or Pennsylvania, this overview highlights the key differences in how each state taxes retirement income and what retirees should consider when planning.

New Jersey

New Jersey offers several tax benefits for retirees, but they depend heavily on income level and age.

1. Social Security Benefits Are Not Taxed

• All Social Security income is fully exempt from NJ state income tax.

  
  

2. Retirement Income Exclusion (Age 62+)

• If you are age 62 or older, distributions from tax‑deferred accounts such as pensions, annuities, IRAs, and 401(k)s may be fully or partially excluded from NJ taxable income.

• Maximum exclusion amounts by filing status:

  • Married Filing Jointly: $100,000

  • Single / Head of Household / Qualifying Widow(er): $75,000

  • Married Filing Separately: $50,000

The exclusion starts to phase out with incomes between $100,000 - $150,000 and there is no exclusion above $150,000.

3. Government Pensions with Employee Contributions

• If you contributed to a government pension, your distributions are typically non‑taxable at the state level until you recover your total employee contributions. After that point, the pension becomes taxable.

  
  

4. Property Tax Relief Programs

New Jersey offers several programs that can significantly reduce property tax burdens for eligible retirees:

• StayNJ – Beginning in 2026, this new program provides major relief for seniors with income up to $500,000. Eligible homeowners can receive a 50% reduction in their property tax bill, up to a maximum credit of $6,500.

• Senior Freeze (Property Tax Reimbursement) – Designed for homeowners age 65+ or those receiving disability benefits. This program reimburses the increase in property taxes above a designated base-year amount. To qualify, applicants must have:

  
  

  – NJ residency for 10+ years

  – Owned and lived in their home for 3+ years

  – Paid property taxes in full

  
  

  The income limit for the most recent filing year was $163,050. Eligible participants receive a reimbursement check each year reflecting the difference between their current taxes and their base-year taxes.

  
  

• ANCHOR – A broad property tax relief program for homeowners and renters with no age restriction. Benefit amounts vary by income level.

  
  

  – Homeowners qualify with income up to $250,000

  – Renters qualify with income up to $150,000

  
  

  ANCHOR payments are issued as direct rebates, not as credits on the state tax return.

  
  

5. Progressive Income Tax Rates

• NJ uses a progressive tax system, with rates that can reach 10.75% for the highest earners, one of the highest top brackets in the country.

  
  

Pennsylvania

Pennsylvania is generally considered one of the most tax friendly states for retirees due to its broad exemptions for retirement income.

1. No Tax on Retirement Income

• Pennsylvania does not tax Social Security benefits, pension income (public or private), IRA withdrawals (after age 59½), 401(k) withdrawals (after age 59½) or military retirement pay.

• For many retirees, this results in zero PA income tax on their primary income sources.

  
  

2. Flat Income Tax Rate

• PA has a flat 3.07% income tax rate for all taxpayers. Since most retirement income is exempt, many retirees owe little to no PA income tax.

Summary

New Jersey offers strong retirement income exclusions for those under certain income thresholds and provides multiple property tax relief programs. However, higher income retirees may face significant state tax.

Pennsylvania, by contrast, provides one of the most favorable tax environments for retirees, with broad exemptions on retirement income and a low, flat tax rate.