New Jersey starts from a different number
Your federal return adds everything up and subtracts losses and adjustments to reach adjusted gross income. New Jersey ignores that number. It sorts income into categories, such as wages, interest, dividends, business income, capital gains and rents, and taxes each one under its own rules. That is why box 16 on your W-2, your New Jersey wages, is often larger than box 1.
Income New Jersey taxes and the IRS does not
- 403(b), 457 and public pension contributions. New Jersey excludes only 401(k) contributions. Teachers, nurses and government employees pay New Jersey tax on their 403(b), 457 and pension contributions now. The upside comes later: that part of the pension or withdrawal is not taxed again.
- Interest from other states’ municipal bonds. Federally tax-free, but New Jersey taxes it. Only New Jersey and U.S. territory bonds are exempt.
- Traditional IRA contributions. Not deductible in New Jersey, so you get that money back tax-free when you withdraw it.
Income the IRS taxes and New Jersey does not
- Social Security. Fully exempt in New Jersey.
- U.S. Treasury interest. Treasury bills, notes, bonds and savings bonds are exempt.
- Unemployment benefits. Exempt in New Jersey.
- Pensions and IRA withdrawals after 62. With total income of $100,000 or less, a couple filing jointly can exclude up to $100,000, and a single filer up to $75,000. Between $100,001 and $150,000 a partial exclusion applies. Above $150,000 there is none.
- New Jersey Lottery prizes of $10,000 or less.
Deductions work differently
- No standard deduction and no itemizing. New Jersey gives a $1,000 exemption for you and your spouse, $1,500 for each dependent, and another $1,000 at 65 or older.
- Property taxes. Homeowners deduct up to $15,000 or take a $50 credit, whichever saves more. Renters count 18% of their rent as property taxes.
- Medical expenses over 2% of New Jersey income are deductible, a much lower bar than the federal 7.5%.
- NJBEST college savings. Up to $10,000 of contributions is deductible with income of $200,000 or less.
- Alimony. Still deductible by the payer and taxable to the recipient in New Jersey, even for divorces after 2018, when the federal deduction ended.
Losses stay in their category
Federally, a capital loss offsets up to $3,000 of other income each year and carries forward, and a business loss can offset wages. In New Jersey, a net loss in one category counts as zero. It cannot reduce wages or any other category, and capital losses do not carry forward to next year. Gains and losses inside the same category still net against each other, so timing a sale can matter.
Business owners
- Depreciation. New Jersey does not allow bonus depreciation and limits the Section 179 deduction to $25,000, so New Jersey depreciation runs on its own schedule.
- BAIT. New Jersey’s pass-through entity tax lets S Corporations and Partnerships deduct New Jersey tax federally. See our BAIT guide.
The 2025 federal deductions do not apply
The federal deductions for qualified tips, overtime, car loan interest and the additional deduction for seniors are federal only. New Jersey has not adopted them, so that income is fully taxed on your New Jersey return.
A worked example
A married couple in Wayne has two children. One spouse is a public school teacher earning $95,000 who puts $7,125 into the state pension and $10,000 into a 403(b). The other earns $85,000 and puts $15,000 into a 401(k). They have $2,500 of Treasury interest, $1,800 of New York municipal bond interest, an $8,000 capital loss and $13,500 of property taxes.
| Federal adjusted gross income | $147,375 |
| Pension and 403(b) contributions New Jersey taxes | $17,125 |
| New York municipal bond interest | $1,800 |
| U.S. Treasury interest New Jersey exempts | ($2,500) |
| Capital loss New Jersey does not allow | $3,000 |
| New Jersey gross income | $166,800 |
| Property tax deduction | ($13,500) |
| Exemptions: two adults, two children | ($5,000) |
| New Jersey taxable income | $148,300 |
| New Jersey tax | $5,419 |
Their New Jersey income is $19,425 higher than their federal AGI, mostly because of the teacher’s retirement contributions. Federally, $5,000 of the capital loss carries forward to next year. In New Jersey it is gone. The property tax deduction is worth $845.59 to them, against a $50 credit, and it is one of the lines we check on every New Jersey return.
This guide is general information based on the law as of the date above, not advice for your situation. Tax rules change, and the right answer depends on your numbers.