CT retirement income now tax friendly!

[ExPatKiwi]

As a CT resident I'd made up my mind to move to a low/no income state for retirement. So it was a surprise to find out recently that CT is becoming retirement tax friendly. Imagine that!

I've been crunching the "tax" numbers and they make retirement in CT look much more attractive such that I may just retire here and start my ROTH conversions.

In 2019 CT introduced new thresholds so there is no state income tax on social security payments with a 100% exemption if federal AGI is below $75k for singles and $100k for joint filers. If AGI is above $100k/$75k then its a 75% exemption.

Next they have introduced tax exemption for pension (401k, tIRA)and annuity income that is recorded on line 5b of your federal 1040.

The exemption ramps in over 5 years (see the table below) impacts pension and annuity income for singles and joint filers with adjusted gross income (AGI) levels of up to $75k and $100k respectively.

TAX YEAR % EXEMPTION
2019 14%
2020 28% LAST YEAR
2021 42%
2022 56%
2023 84%
2024 100%

 

[pb4uski]

Sounds like they are trying to prevent a mass exodus as boomers reach retirement age.

 

[Sue J]

In Ohio we've had SS exempt from state tax for a long time. I think it's for all income levels. Tax exemption (even for partial) for pension would be LOVELY!

 

[Flyfish1]

This is somewhat good news as we will retiring to CT from NJ...I know crazy, eh?
So, above 100K AGI, SS has a 75% exemption, and is the same true for tIRA/401K income?

 

[Koolau]

Quick search suggests CT has been loosing population for several years. No idea of the demographics involved nor if state taxes are implicated.

Hawaii has also lost population during the same period and it has had many exemptions (most pensions, SS, some 401(k)) for several years. In fact, HI seems to favor its Senior Citizens (Kupuna) in most financial ways controlled by the State. YMMV

 

[jim584672]

NY exempts $20,000 for pensions/IRA withdrawals. Also no Social Security taxes.

 

[ExPatKiwi]

This is somewhat good news as we will retiring to CT from NJ...I know crazy, eh?
So, above 100K AGI, SS has a 75% exemption, and is the same true for tIRA/401K income?

No it looks to be a hard cutoff at $100k.

 

[joesxm3]

Taxable IRA seems to be on line 4b not 5b. So this would seem to benefit only those receiving pensions like the many state employees and not people who have saved in IRA's. I did see some mention that 401K would be on line 5b.

If that is correct, someone in CT would be losing out by rolling over a 401K into an IRA, would they not?

It would also seem that ROTH conversions would be still taxed in CT as well as withdrawals from IRA's.

If I am missing some law that included IRA, please provide link to the source.

Thanks.

 

[ExPatKiwi]

Taxable IRA seems to be on line 4b not 5b. So this would seem to benefit only those receiving pensions like the many state employees and not people who have saved in IRA's. I did see some mention that 401K would be on line 5b.

If that is correct, someone in CT would be losing out by rolling over a 401K into an IRA, would they not?

It would also seem that ROTH conversions would be still taxed in CT as well as withdrawals from IRA's.

If I am missing some law that included IRA, please provide link to the source.

Thanks.

Yes, it's not well publicized and confusing to say the least. The best I've been able to do is use my HR Block software to test it out.



https://www.cthousegop.com/bolinsky/new-connecticut-tax-exemption-for-retirees/



https://portal.ct.gov/-/media/DRS/Forms/2020/Income/CT-1040-Online-Booklet_0221.pdf


(see instructions for line 48b on the CT-1040 tax form

 

[Gumby]

I am still unclear about the distributions from 401k, 403b or 457 plans. I looked in the applicable Connecticut General Statute (CGS 12-701(a)). It does not have a definition for pension and annuity income, which leads me to believe that the definition comes from the federal definition in the Internal Revenue Code. Looking at IRS publication 575, it appears to be the case that they are talking about plans that have been annuitized and have a regular periodic payout schedule, not about full or partial withdrawals after the end of service. If that is the case, then it makes sense that an IRA withdrawal is not included, because it is not annuitized but entirely at the direction of the taxpayer.

However, if the statute contemplates exclusion of straight 401k withdrawals from CT AGI, then the differential treatment between 401k and IRA distributions does not seem fair to me, especially for an IRA rolled over from a prior 401k. I am looking for better guidance

 

[target2019]

NJ phased in a similar ($100,000 for married couple) exclusion for pension income, and it took full effect in 2020. https://www.state.nj.us/treasury/taxation/njit7.shtml

 

[ExPatKiwi]

Taxable IRA seems to be on line 4b not 5b. So this would seem to benefit only those receiving pensions like the many state employees and not people who have saved in IRA's. I did see some mention that 401K would be on line 5b.

If that is correct, someone in CT would be losing out by rolling over a 401K into an IRA, would they not?

It would also seem that ROTH conversions would be still taxed in CT as well as withdrawals from IRA's.

If I am missing some law that included IRA, please provide link to the source.

Thanks.

You got me looking at this more closely as I've previously done 401k after-tax rollovers to my ROTH IRA and decided to see how they are recorded on line 5a and 5b. You are correct this CT tax exemption appears to favor taxable 401k distributions over taxable IRA distributions that would be entered on line 4b


It had to be too good to be true....so maybe I will be moving out of state to FIRE after all!

 

[Perryinva]

It’s been said a hundred times before. Moving to a different state solely because it has no state income tax is short sighted. All states get their taxes one way or another. States with no/low income tax typically have either poorer services or higher taxes elsewhere.

There is not one no income tax state I would choose to actually want to live in that didn’t end up costing as much or more in other areas. I lived in CT from age 11 to 21, and like any state I have either lived in or visited often, there are crapholes and garden spots.

The garden spots cost more than the crapholes everywhere.

Quality of life is far more important than what? $2-3k savings in income taxes? For retirement, a $2-3k difference in costs better not have much, if any impact on your life, or some serious rethinking is required.

Just my $.02, YMMV of course.

 

[upset264]

It’s been said a hundred times before. Moving to a different state solely because it has no state income tax is short sighted. All states get their taxes one way or another. States with no/low income tax typically have either poorer services or higher taxes elsewhere.

There is not one no income tax state I would choose to actually want to live in that didn’t end up costing as much or more in other areas. I lived in CT from age 11 to 21, and like any state I have either lived in or visited often, there are crapholes and garden spots.

The garden spots cost more than the crapholes everywhere.

Quality of life is far more important than what? $2-3k savings in income taxes? For retirement, a $2-3k difference in costs better not have much, if any impact on your life, or some serious rethinking is required.

Just my $.02, YMMV of course.

You're correct that all states get their revenue one way or another, however it's the spending rather than the revenue that's the issue. If you use or depend on a lot of government services you might be better off in a high tax big spending state. If you're pretty much self reliant that might not be the case.

 

[teejayevans]

It’s been said a hundred times before. Moving to a different state solely because it has no state income tax is short sighted. All states get their taxes one way or another. States with no/low income tax typically have either poorer services or higher taxes elsewhere.

There is not one no income tax state I would choose to actually want to live in that didn’t end up costing as much or more in other areas. I lived in CT from age 11 to 21, and like any state I have either lived in or visited often, there are crapholes and garden spots.

The garden spots cost more than the crapholes everywhere.

Quality of life is far more important than what? $2-3k savings in income taxes? For retirement, a $2-3k difference in costs better not have much, if any impact on your life, or some serious rethinking is required.

Just my $.02, YMMV of course.

Some states like Florida/Tennessee tax the visitors: hotels, rental cars get taxed.
Florida real estate taxes are higher as well, of course you can limit this by not buying an expensive home.

 

[jazz4cash]

In MD we can exclude up to $34.3k of pension or SS income per individual if over 65. It includes workplace savings (401k) but not IRAs. I’m just learning about this and it seems somewhat generous in light of the income caps some others have. Someone here warned me about losing this benefit if you convert your 401k to an IRA.

 

[DektolMan]

I live in CT and decided to reach out to my state senator. They just got back to me.


"Thank you for reaching out to Senator Sampson and we apologize for the delay in response as the Senator and I dig out of the thousands of emails our office received over the past few weeks.

I asked our office’s budget and tax analyst to put together the most recent information for you regarding tax exemptions for retirees. I hope the information below is helpful.


“Section 469 of the implementor bill phases out, over four years, the income tax on income from IRAs-other than Roth IRAs. The below information is from the OLR summary of the act.

INCOME TAX EXEMPTIONS FOR CERTAIN RETIREMENT INCOME Phases out, over four years, the income tax on income from IRAs, other than Roth IRAs, for taxpayers with qualifying incomes, starting with the 2023 tax year…

The bill phases out the income tax on certain taxpayers’ distributions from IRAs, other than Roth IRAs, over four years beginning with the 2023 tax year. As under existing law for pension and annuity income, taxpayers qualify for the exemption only if their federal AGI is below (1) $75,000 for single filers, married people filing separately, or heads of households or (2) $100,000 for married people filing jointly. The bill exempts an increasing portion of IRA income until the income is fully exempt in the 2026 tax year as shown in the table below.”

“Current law provides the following information on which annuities and pension are applicable:

This is from the 2020 Connecticut resident income tax booklet https://portal.ct.gov/-/media/DRS/Forms/TSCinc/CT-1040booklet.pdf ( page 26 ):

Line 48b: 28% of Pension or Annuity Income

If your filing status is single, married filing separately, or head of household with federal AGI for the taxable year of less than $75,000 or married filing jointly with federal AGI of less than $100,000, and you receive income from certain pensions and annuities, such as from a defined benefit plan, 401(k), 403(b) or 457(b) plans, you qualify for this subtraction modification.
The following amounts are not included in Line 5b of the federal income tax return and should not be added when calculating the pension and annuity amount for Line 48b of Form CT-1040:
• Disability pensions received before the recipient met the minimum retirement age set by his or her employer;
• Corrective distributions of excess elective deferrals or other excess contributions to retirement plans; and
• Distributions from traditional IRAs, Roth IRAs, simplified employee pension (SEP) IRAs, and savings incentive match plans for employees (SIMPLE) IRAs.
On federal Form 1040, or federal Form 1040-SR, IRA distributions and pensions and annuities are reported on separate lines.
To determine the amount to enter on this line, begin with the amount reported on federal Form 1040, Line 5b, or federal Form 1040-SR, Line 5b, Taxable amount of pensions and annuities. From the amount on Line 5b, subtract military retirement pay,

Tier 1 and Tier 2 railroad retirement benefits, and Connecticut teachers’ retirement pay. Multiply the result by 28%. Enter the amount on this line.
Military retirement pay and Tier 1 and Tier 2 railroad retirement benefits are fully exempt from Connecticut income tax, and should not be included in this calculation. The subtraction modification for these benefits are reported on Lines 44 and 43, respectively, on the Connecticut return. Taxpayers who receive income from the Connecticut Teachers’ Retirement Board are already allowed to exempt 25% of that income from Connecticut income tax on Line 45 of the Connecticut return.

Connecticut law does not allow a double benefit for the same income.

A survivor or beneficiary of a plan participant may claim the 28% subtraction modification for Connecticut income tax purposes in the same manner as the plan participant would have been allowed to claim the modification, if such survivor or beneficiary is required to report the pension and annuity income on the federal income tax return in the same manner as the plan participant would have reported such income.”


I then asked the Office of Legislative Research to provide an answer based on your example of traditional IRAs and annuities.

From OLR:

“I think we’ll have to wait for DRS guidance to be able to say for sure which accounts are included in the exemption. (I checked the DRS legislation summary, but it didn’t provide any further detail.) But I’m inclined to say that, since the only exclusion is for Roth IRAs, the account types you mention would be included.”


Again, this is a lot of information but hopefully this helps you understand the exemptions a little bit better. The CT DRS will hopefully put out more information going forward to hopefully clarify so I would suggest you keep an eye out for that as well."





I sure hope they follow through with this

 

[ExPatKiwi]

I live in CT and decided to reach out to my state senator. They just got back to me.

"Thank you for reaching out to Senator Sampson and we apologize for the delay in response as the Senator and I dig out of the thousands of emails our office received over the past few weeks.

I then asked the Office of Legislative Research to provide an answer based on your example of traditional IRAs and annuities.

From OLR:

“I think we’ll have to wait for DRS guidance to be able to say for sure which accounts are included in the exemption. (I checked the DRS legislation summary, but it didn’t provide any further detail.) But I’m inclined to say that, since the only exclusion is for Roth IRAs, the account types you mention would be included.”


Again, this is a lot of information but hopefully this helps you understand the exemptions a little bit better. The CT DRS will hopefully put out more information going forward to hopefully clarify so I would suggest you keep an eye out for that as well."

I sure hope they follow through with this

and if it wasn't already confusing enough a CT Senator has filed bill No 5060 to change the law to explicitly include "traditional" retirement accounts in the tax exemption.


https://www.cga.ct.gov/asp/cgabills...illType=Bill&bill_num=HB05060&which_year=2020


https://www.cga.ct.gov/2020/TOB/h/pdf/2020HB-05060-R00-HB.PDF

https://ctmirror.org/category/ct-vi...ld-treat-pensions-and-401k-accounts-the-same/

 

[copyright1997reloaded]

For fun, I modified a spreadsheet found a while back on Boggleheads. It has quite intricate abilities to enter different types of income and get the resulting tax exposure back. It also has the ability to enter a state code to determine state tax impact. Anyway, I changed it to do ALL of the states at once (vs. just selecting a state).

The following is output assuming:
Single
100K in total income: 60K tIRA distribution, 25K Social security, 5K in taxable interest, 10K in qualified dividends.

Below are the taxes by state, ranked by $ (lowest to highest):

$	% Fed	State	Rank
$0 	0.0%	Alaska	1
$0 	0.0%	Fla.	1
$0 	0.0%	Nev.	1
$0 	0.0%	S.D.	1
$0 	0.0%	Tenn.	1
$0 	0.0%	Tex.	1
$0 	0.0%	Wash.	1
$0 	0.0%	Wyo.	1
$21 	0.0%	Ga.	9
$196 	0.2%	N.J.	10
$461 	0.5%	Pa.	11
$627 	0.7%	Ill.	12
$630 	0.7%	N.H.	13
$1,330 	1.4%	N.D.	14
$1,573 	1.6%	Ohio	15
$1,947 	2.0%	Ariz.	16
$2,390 	2.5%	Ind.	17
$2,570 	2.7%	N.Y.	18
$2,841 	3.0%	Colo.	19
$2,979 	3.1%	Mich.	20
$2,980 	3.1%	La.	21
$3,065 	3.2%	Miss.	22
$3,194 	3.3%	Conn.	23
$3,194 	3.3%	Okla.	24
$3,249 	3.4%	Md.	25
$3,278 	3.4%	R.I.	26
$3,373 	3.5%	N.C.	27
$3,510 	3.6%	Ala.	28
$3,552 	3.7%	Calif.	29
$3,562 	3.7%	Wis.	30
$3,565 	3.7%	Mass.	31
$3,609 	3.7%	Del.	32
$3,616 	3.8%	Ky.	33
$3,708 	3.9%	D.C.	34
$3,739 	3.9%	Maine	35
$3,743 	3.9%	Va.	36
$3,794 	3.9%	Mo.	37
$3,822 	4.0%	N.M.	38
$3,849 	4.0%	S.C.	39
$3,964 	4.1%	Idaho	40
$4,011 	4.2%	Utah	41
$4,034 	4.2%	Ark.	42
$4,193 	4.4%	Iowa	43
$4,366 	4.5%	Vt.	44
$4,730 	4.9%	Kans.	45
$5,001 	5.2%	W.Va.	46
$5,031 	5.2%	Nebr.	47
$5,165 	5.4%	Hawaii	48
$5,298 	5.5%	Minn.	49
$5,538 	5.8%	Mont.	50
$6,075 	6.3%	Ore.	51

I've been running it with a variety of scenarios (for myself w/pension, etc.) I would also like to modify it to include sales tax and property taxes (e.g. w/rates and also allow myself to include spending assumptions for sales taxes). I haven't done this (yet) because it is nice outside and I need to do summer projects while I am off (from college teaching classes). So it will likely wait until fall.

ETA: The scenario above assumes age 65+ (which makes a difference in places like GA). I'm not there yet but I am trying to plan out possible relocation scenarios.

 

[Graybeard]

I live in CT and decided to reach out to my state senator. They just got back to me.


"Thank you for reaching out to Senator Sampson and we apologize for the delay in response as the Senator and I dig out of the thousands of emails our office received over the past few weeks.

I asked our office’s budget and tax analyst to put together the most recent information for you regarding tax exemptions for retirees. I hope the information below is helpful.


“Section 469 of the implementor bill phases out, over four years, the income tax on income from IRAs-other than Roth IRAs. The below information is from the OLR summary of the act.

INCOME TAX EXEMPTIONS FOR CERTAIN RETIREMENT INCOME Phases out, over four years, the income tax on income from IRAs, other than Roth IRAs, for taxpayers with qualifying incomes, starting with the 2023 tax year…

The bill phases out the income tax on certain taxpayers’ distributions from IRAs, other than Roth IRAs, over four years beginning with the 2023 tax year. As under existing law for pension and annuity income, taxpayers qualify for the exemption only if their federal AGI is below (1) $75,000 for single filers, married people filing separately, or heads of households or (2) $100,000 for married people filing jointly. The bill exempts an increasing portion of IRA income until the income is fully exempt in the 2026 tax year as shown in the table below.”

“Current law provides the following information on which annuities and pension are applicable:

This is from the 2020 Connecticut resident income tax booklet https://portal.ct.gov/-/media/DRS/Forms/TSCinc/CT-1040booklet.pdf ( page 26 ):

Line 48b: 28% of Pension or Annuity Income

If your filing status is single, married filing separately, or head of household with federal AGI for the taxable year of less than $75,000 or married filing jointly with federal AGI of less than $100,000, and you receive income from certain pensions and annuities, such as from a defined benefit plan, 401(k), 403(b) or 457(b) plans, you qualify for this subtraction modification.
The following amounts are not included in Line 5b of the federal income tax return and should not be added when calculating the pension and annuity amount for Line 48b of Form CT-1040:
• Disability pensions received before the recipient met the minimum retirement age set by his or her employer;
• Corrective distributions of excess elective deferrals or other excess contributions to retirement plans; and
• Distributions from traditional IRAs, Roth IRAs, simplified employee pension (SEP) IRAs, and savings incentive match plans for employees (SIMPLE) IRAs.
On federal Form 1040, or federal Form 1040-SR, IRA distributions and pensions and annuities are reported on separate lines.
To determine the amount to enter on this line, begin with the amount reported on federal Form 1040, Line 5b, or federal Form 1040-SR, Line 5b, Taxable amount of pensions and annuities. From the amount on Line 5b, subtract military retirement pay,

Tier 1 and Tier 2 railroad retirement benefits, and Connecticut teachers’ retirement pay. Multiply the result by 28%. Enter the amount on this line.
Military retirement pay and Tier 1 and Tier 2 railroad retirement benefits are fully exempt from Connecticut income tax, and should not be included in this calculation. The subtraction modification for these benefits are reported on Lines 44 and 43, respectively, on the Connecticut return. Taxpayers who receive income from the Connecticut Teachers’ Retirement Board are already allowed to exempt 25% of that income from Connecticut income tax on Line 45 of the Connecticut return.

Connecticut law does not allow a double benefit for the same income.

A survivor or beneficiary of a plan participant may claim the 28% subtraction modification for Connecticut income tax purposes in the same manner as the plan participant would have been allowed to claim the modification, if such survivor or beneficiary is required to report the pension and annuity income on the federal income tax return in the same manner as the plan participant would have reported such income.”


I then asked the Office of Legislative Research to provide an answer based on your example of traditional IRAs and annuities.

From OLR:

“I think we’ll have to wait for DRS guidance to be able to say for sure which accounts are included in the exemption. (I checked the DRS legislation summary, but it didn’t provide any further detail.) But I’m inclined to say that, since the only exclusion is for Roth IRAs, the account types you mention would be included.”


Again, this is a lot of information but hopefully this helps you understand the exemptions a little bit better. The CT DRS will hopefully put out more information going forward to hopefully clarify so I would suggest you keep an eye out for that as well."





I sure hope they follow through with this

@DektolMan Rob Sampson is a good guy, definitely one of if not the best. I never understood the definitions for an "IRA" - traditional IRA, deductible IRA, non deductible IRA, rollover IRA, this crap makes my head hurt!

Are RMDs from a 401k getting the tax exemptions?

Are RMDs from a rollover IRA (from my 401k now at Vanguard) getting the tax exemptions?

Thanks!

 

[indiajust]

New NH Law in this budget just passed, they phased out the Interest and Dividend tax entirely. Still no income tax or sales tax. Just property. And man is that cruel.

 

[kjpliny]

New NH Law in this budget just passed, they phased out the Interest and Dividend tax entirely. Still no income tax or sales tax. Just property. And man is that cruel.

Don't feel bad. My property taxes in NY are higher than those in NH for a similar house ($17k/yr) and I have high sales (8.25%) and income taxes (6%) as well. I live in a small 3 BR ranch built in the 60s.