Is Disability Income Taxable in New Jersey?

by Tom Streissguth

    New Jersey residents pay state as well as federal income taxes. The state exempts various benefits from income tax, including disability payments. Disabled residents of the Garden State still may owe federal tax, however, on a portion of their Social Security disability benefits.

    Exemptions

    New Jersey exempts disability benefits from taxable income. In addition, if you can provide proof of your disability, you can take advantage of a $1,000 disability exemption, over and above the standard $1,000 personal exemption all state residents may claim. You must provide proof that you were disabled on the last day of the year for which you're filing taxes. After the first time you claim the exemption, you don't need to furnish proof in subsequent years, as long as you remain disabled. You may only claim the exemption for yourself or your spouse or civil union partner; you may not claim it for a dependent.

    State Disability Benefits

    The state of New Jersey offers temporary disability benefits to qualified residents. The benefits are paid out of employer contributions to a state disability fund. As a result, for federal income tax purposes, the IRS considers these benefits to be taxable sick pay, subject to Social Security and Medicare taxes as well as income taxes. You must report these benefits, which your employer reports on the W-2 form, on your federal return.

    Homestead Benefit and the Disabled

    Disabled New Jersey residents can also take advantage of a homestead benefit if they occupied a New Jersey home as their principal place of residence as of October 2011. The homestead benefit reduces property tax paid on that residence. For disabled homeowners, the gross income limit for claiming the benefit is $150,000, double the standard limit for non-disabled taxpayers under the age of 65.

    Social Security Disability

    If you receive Social Security disability benefits, the percentage that is taxable depends on your filing status and "combined" income level, which includes half your Social Security benefits as well as wages and interest income. If you are single, and earning at least $25,000 in combined income, half your disability benefits are added to your taxable income. If you are married filing a joint return, the 50 percent threshold begins at $32,000 in combined income.

    About the Author

    Tom Streissguth has worked for over 15 years in the legal field as a writer and legal assistant, and has authored numerous articles on Social Security disability law. He has many nonfiction and reference titles in print, including works for The Gale Group and Lerner. He holds a Bachelor of Arts from Yale University.

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