Sounds like your wife retired under TPAF pension plan. Her deductions from her paycheck were deferred for Federal ( but not State of NJ) income tax.
When she started to collect, her pension payments became taxable for Federal income taxes.
Her pension payments will not be taxable for NJ income taxes until she has recovered her contributions.
For example, if her pension payments received are $20,000 per year but her lifetime pension contributions deducted from her paycheck were $80,000, then she would indicate the General Rule as she will not recover her contribution in a 3 year period. Her pension will not be taxable every year until she reaches the $80,000 amount ( 4 years).
The pension payments from her plan are not calculated on what she paid in, it is a calculation based on her last 5 years of salary divided by 55 and then multiplied by a percentage. Her plan is NOT a defined contribution plan where your pension payments are based on what you paid in.
