If you live in Connecticut, you may want to retire to a location that has a milder climate, and this is understandable. In addition to the weather, you should also consider the tax climate when you are choosing a retirement destination.
Income Taxes on Retirement Income
There are 41 states in the union with state-level estate taxes, so you do not have to pay taxes on any type of income if you live in any one of nine states. They are Texas, Florida, Nevada, South Dakota, New Hampshire, Tennessee, Washington, Alaska, and Wyoming.
Residents of Pennsylvania, Illinois, and Mississippi have to pay state-level income taxes, but they are not levied on pensions, 401(k) distributions, or individual retirement account distributions.
Pension recipients do not have to pay state-level income taxes on their benefits in Hawaii and Alabama, but IRA and 401(k) distributions are taxable.
Estate Taxes
It is natural to be concerned about taxes that you may or may not pay while you are living, but there is another element to take into consideration. There are 12 states that have state-level estate taxes, and we do have an estate tax in Connecticut.
If you were to spend your retirement years in another state, you could potentially preserve more of your legacy if the estate tax would be a factor for you. The exclusion is the amount that can be transferred tax-free before the remainder would be taxed, and it stands at $7.1 million.
Connecticut is the only state in the union with a gift tax and an estate tax, so you cannot give lifetime gifts to avoid the tax. This is a list of the states aside from Connecticut that have state-level estate taxes:
- Illinois
- Hawaii
- Oregon
- Maryland
- New York
- Massachusetts
- New Hampshire
- Maine
- Minnesota
- Washington
- Rhode Island
In addition to these states, the District of Columbia has its own estate tax.
You are not necessarily free of state-level estate taxes if you do not live in any of these states. If you own property in one of them, and its value exceeds the exclusion, the estate tax there would apply to your estate.
The exclusion in Massachusetts is just $1 million, so you should do some research if you own valuable property out-of-state.
We should touch upon the fact that there is a federal estate tax that is applicable all over the country. It carries a 40 percent rate, so it can have a major impact on your legacy.
That’s the bad news, but the good news is that the exclusion is $11.7 million. It will remain at this level through 2025 indexed for inflation on an annual basis. There is a federal gift tax that is unified with the estate tax, so large lifetime gifts are taxable at the same rate.
Inheritance Taxes
As we have stated, an estate tax is levied on the taxable portion of an estate before it is transferred to the heirs, so there is one instance of taxation. An inheritance tax can be applied on distributions to each individual inheritor.
There is no federal inheritance tax, but there are five states with state-level inheritance taxes. These five states are Nebraska, Pennsylvania, New Jersey, Maryland, and Kentucky.
Iowa has had an inheritance tax, but it was repealed, so it is being phased out over the next few years.
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We enjoy sharing information with our neighbors at our seminars, and there are a number of them on the schedule right now. You will learn a lot if you join us, and there is no charge, so should definitely take advantage of one of these opportunities.
The dates are posted on our seminar schedule page, and when you identify the session that works for you, follow the instructions to register so we can reserve your spot.
Need Help Now?
If you are ready to work with a Glastonbury, CT estate planning lawyer to put a plan in place, we are here to help. You can send us a message to set up a consultation appointment, and we can be reached by phone at 860-548-1000.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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