Does Connecticut Tax Pensions? Rules and Exemptions
Understand how Connecticut taxes pension income, including key rules and available exclusions, to manage your retirement finances.
Connecticut’s tax landscape for retirees often raises questions, especially concerning pension income. This article aims to clarify the general taxability of pension income in Connecticut, detail the available exemptions and deductions, and provide guidance on how to report this income for state tax purposes.
General Taxability of Pension Income in Connecticut
In Connecticut, pension and annuity income is generally subject to state income tax. This applies to various types of retirement benefits, including private employer pensions, federal government pensions, and state and local government pensions.
These income streams are typically included in a taxpayer’s federal adjusted gross income (AGI), which serves as the starting point for calculating Connecticut income tax. Therefore, unless specific exemptions or deductions apply, the full amount of pension income reported on federal tax returns will be subject to Connecticut’s income tax rates.
Exemptions and Deductions for Pension Income
Connecticut offers several exemptions and deductions that can reduce or eliminate the state income tax on pension income, depending on specific criteria. These provisions aim to provide tax relief for qualifying retirees.
A significant exemption applies to general pension and annuity income for taxpayers who meet certain adjusted gross income (AGI) thresholds. For single filers, married individuals filing separately, or heads of household, 100% of general pension and annuity earnings are exempt if their federal AGI is less than $75,000. For couples filing jointly, the full exemption applies if their federal AGI is less than $100,000. Beginning with the 2024 tax year, the law introduces a gradual phase-out for taxpayers whose AGI exceeds these initial thresholds. Single filers or heads of household with AGI between $75,000 and $99,999, and joint filers with AGI between $100,000 and $149,999, may qualify for a partial exemption, which gradually reduces as income increases.
Certain types of pension income receive specific favorable tax treatment. Military retirement pay is fully exempt from Connecticut income tax, regardless of the taxpayer’s AGI. Similarly, Tier 1 and Tier 2 railroad retirement benefits are also fully exempt from state income tax.
For those receiving income from Individual Retirement Accounts (IRAs), excluding Roth IRAs, a phased-in exemption applies. For the 2024 tax year, 50% of IRA income may qualify for an exemption, provided the taxpayer meets the same AGI thresholds as the general pension and annuity exemption. This percentage is scheduled to increase to 75% in 2025 and reach 100% by 2026. Additionally, taxpayers receiving benefits from the Connecticut Teachers’ Retirement System (TRS) may deduct 50% of their pension income from their Connecticut taxable income. If a taxpayer is eligible for both the general pension and annuity exemption and the TRS pension exemption, they can claim the one most beneficial to them.
Reporting Pension Income for Connecticut Taxes
Reporting pension income and claiming applicable exemptions on your Connecticut income tax return involves specific forms. Taxpayers generally begin with their federal adjusted gross income (AGI) as the base for their Connecticut return, which includes their gross pension income.
To claim the pension and annuity income subtraction, taxpayers typically use Form CT-1040. Line 48b on Schedule 1 of Form CT-1040 is designated for pension or annuity income subtractions. Taxpayers determine their eligible exclusion amount, based on the AGI thresholds and pension types, by completing the Pension and Annuity Worksheet provided in the Form CT-1040 instructions. This worksheet helps calculate the precise amount that can be subtracted from federal AGI for Connecticut tax purposes.
For specific exemptions like military retirement pay or railroad retirement benefits, these amounts are subtracted from federal AGI on designated lines within the Connecticut income tax forms. Taxpayers should have their Form 1099-R, which reports retirement plan distributions, available as it provides the necessary income figures for accurate reporting. Official Connecticut tax forms and instructions are available on the Connecticut Department of Revenue Services (DRS) website.