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New York State income tax exclusion protects retirement funds

My wife and I each have our own IRAs. Also, I have a 401(k) plan, and she’ll have a state-paid pension when she retires. I understand there’s a New York State income tax exclusion for up to $20,000 of income from private pensions and annuities. Three questions: Does that exclusion also apply to income from IRAs and 401(k) plans? Can each of us claim our own exclusion when filing a joint tax? And is my wife’s state-paid pension free of New York State income tax?

Yes, yes, and yes.

New York’s Pension and Annuity Income Exclusion is available to all state residents who are over age 59 1⁄2. This exclusion applies to up to $20,000 of annual income received from tax-deferred accounts, including IRAs and employer-sponsored retirement plans. Each taxpayer gets a $20,000 annual tax exclusion. Spouses can’t claim unused portions of each other’s exclusions. For example, if John has $25,000 of IRA income, and Judy has $15,000 of IRA income, together they can only exclude $35,000 of income ($20,000 plus $15,000) on their New York tax return.

The $20,000 exclusion can also be claimed by retirement account beneficiaries — regardless of their ages — on annual income from inherited accounts, provided the original account owner was at least 59 1⁄2. (But the decedent had only one $20,000 exclusion. So if he had three IRA beneficiaries, for example, they’d have to divide that exclusion among them.)

Your wife qualifies for a different tax break on her retirement income from a state-paid pension: New York’s unlimited tax exclusion on annual income received from federal, state and local government pensions.

THE BOTTOM LINE New Yorkers over age 59 1⁄2 pay no state income tax on their first $20,000 of annual retirement income. Federal income tax still applies.



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