The current method for calculating Connecticut income tax on retirement income is deeply flawed.

As many are aware, in 2019 Connecticut implemented changes to its tax code that fully exempted certain types of retirement income for persons with incomes under limits based on federal adjusted gross income (AGI). Specifically, if an individual tax filer has a federal AGI under $75,000 and a couple filing jointly has a federal AGI under $100,000, Social Security income and pension income are fully exempted. 

In addition, starting in 2023 exemptions for IRA withdrawals will be phased in over a period of four years, but the exemption will only apply to the same thresholds stated above ($75,000/$100,000).  Unfortunately, if an individual goes over this income limit by even $1, the exemptions are almost entirely eliminated.

How does this translate for income tax owed?  Here are three examples using Connecticut income tax tables and the 2021 version of TurboTax.

  • A married couple’s income goes from $99,999 to $100,000 and their Connecticut state tax due rises from $57 to $2,844, a 4,899% increase.
  • Two single retired people with identical retirement incomes of $65,500 would each pay $0 in state income tax, but if they are married their state income tax filing jointly would rise to $3,800.
  • A single retired person with a prior income of $65,500 who has a COLA and has to take an required minimum distribution in 2021 might see their taxes go from $0 to $2,216 for exceeding the $75,000 threshold by $1.

These are just three hypothetical scenarios, but there are thousands of retired persons in Connecticut for whom these situations are not hypothetical. And, as retirees receive COLAs in their Social Security and retirement income this year, and in subsequent years, the number of people affected by the income cliff and the marriage penalty built into the current tax legislation will only increase.

In general, Connecticut’s tax tables use a graduated tax structure on personal income. This is similar to the federal income tax system where higher tax rates are applied on the margin, i.e., on the first and every dollar over each threshold while maintaining lower rates for income ranges below that. However, in the case of exempting certain types of retirement income, there is nothing gradual about what happens when your income rises in Connecticut. One dollar over and you have lost the exemption. Instead of owing incrementally more on rising income, the retiree owes thousands of dollars more in taxes. Pretty harsh.

The intent of the changes in the tax code was to give a break to retirees, and to try to keep retirees (and the money they spend in Connecticut) from leaving the state for tax reasons. While the law may have accomplished this for many retirees, its current provisions punish many others with comfortable, but not excessive incomes, earned through years of hard work. Given this it is understandable why Connecticut residents in this situation would seriously contemplate relocating to a more tax friendly state.

I believe in paying my fair share, but the current tax policy for retiree income is not structured in a way that feels logical or fair.   This year for the first time there is broad bi-partisan support in the legislature to eliminate the income cliff and the marriage penalty.   Proposals are being considered by the Finance, Revenue & Bonding Committee.     

It is important that concerned taxpayers urge the governor, our legislators, and members of the Finance, Revenue & Bonding Committee to take action on a bill  which will mitigate the outsize impact of current tax policy on middle-income retirees.

Rebecca Anderson lives in Durham.