New Rules on Taxation of IRA Distributions
Connecticut is phasing in tax exemptions for pensions and retirement account distributions for eligible taxpayers. This applies to single filers with adjusted gross income (AGI) below $75,000 and joint filers with AGI below $100,000. Some partial exemptions at higher incomes.
The exemption schedule is as follows:
- 2024: 50% of IRA distributions exempt
- 2025: 75% of IRA distributions exempt
- 2026 and beyond: 100% of IRA distributions exempt for eligible taxpayers
New Rules on Withholding from IRA Distributions
Starting January 1, 2025, Connecticut will adjust withholding rules for retirement income distributions, including IRAs:
- Withholding becomes optional unless requested by the payee
- Mandatory withholding at the highest marginal tax rate for lump-sum distributions exceeding $5,000 or 50% of the account balance, whichever is less, if no specific request is made
New Rules on Taxation of Social Security Income
From 2024, Connecticut offers full or partial exemptions for Social Security benefits based on AGI and filing status:
- Fully tax-exempt for single filers and married filing separately with AGI below $75,000
- Fully tax-exempt for married filing jointly, qualifying widow(er), and head of household with AGI below $100,000
For higher AGIs:
- Up to 25% of federally taxable Social Security benefits may be subject to Connecticut state income tax
- State tax rates range from 3.00% to 6.99%, depending on the income bracket
Key Differences and Impact
IRA taxation allows partial benefits for those slightly exceeding AGI thresholds, while Social Security taxation follows a cliff-edge approach. Similar to the IRMAA Tax (premium surcharge on Part B) this cliff effect can result in high effective marginal tax rates. For example, a couple just $1,000, or even $1, over the threshold could face an additional $842 in state tax.
If you anticipate current or future income around the income breakpoints, it is important to plan ahead, and consult a tax professional (your CPA) and financial advisor for personalized guidance, especially given the significant financial implications of the cliff effect.