If you retire in Connecticut, you may have to pay state income tax on your retirement income, but there are certain exclusions that apply. Connecticut state income tax rates range from 3 percent up to a maximum of 6.5 percent on taxable income over $500,000 ($1,000,000 if filing jointly). On your Connecticut tax return you start with your federal adjusted gross income and make certain additions and deductions to determine your Connecticut taxable income.
Interest and dividends
Interest income from state and local municipal obligations is exempt for federal income tax purposes but is taxable in Connecticut. This is one of the amounts you have to add back in determining your Connecticut taxable income. But interest from bonds or other obligations in the State of Connecticut or its municipalities is exempt in Connecticut.
If you receive exempt-interest dividends from a mutual fund that invests in state or municipal government obligations other than Connecticut, that income must also be added in your Connecticut tax return. If the exempt-interest dividends are income from both Connecticut and other states, you would only add the portion from outside Connecticut.
On your Connecticut return you can subtract interest and dividends from the U.S. government such as U.S. Series EE, I, or HH bonds and Treasury bills or notes that were included in taxable income on your federal tax return. This would also apply to income from mutual funds that invest in U.S. government obligations.
If you received any interest, dividends or capital gains on amounts you contributed to an account set up for a beneficiary under the Connecticut Homecare Option Program for the Elderly, you can subtract that income on your Connecticut return if it had to be included in the beneficiary’s income for federal tax purposes.
According to the Connecticut Department of Revenue Services, if you file a Connecticut state tax return as single, married filing separately or civil union filing separately, none of your Social Security benefits are taxable in Connecticut if your federal adjusted gross income is less than $50,000. If your filing status is married filing jointly, civil union filing jointly, head of household or qualifying widow(er) with dependent child, your Social Security benefits are entirely exempt in Connecticut if your federal adjusted gross income is less than $60,000.
If your federal adjusted gross income is over the limit for your filing status, your Social Security benefits may be partially taxable in Connecticut. You would have to fill out the Social Security Benefit Adjustment Worksheet in the Connecticut tax return instructions to determine the taxable portion.
If you received railroad retirement benefits or annuities that you had to include on your federal tax return, you can subtract those benefits on your Connecticut return to the extent you did not already subtract them as part of the adjustment for Social Security benefits.
On your Connecticut tax return you can subtract 50 percent of the military retirement pay you included on your federal tax return. This applies to retired members of the U.S. armed forces or the National Guard and beneficiaries who are receiving survivor benefits. Former spouses of retired members of the military who are receiving military retirement pay according to a divorce or legal separation agreement do not qualify to exclude 50 percent of the benefits.
Connecticut Resident Income Tax Return and Instructions – Connecticut Department of Revenue Services
Taxability of Social Security Benefits for Connecticut Income Tax Purposes – Connecticut Department of Revenue Services