CONNECTICUT INCOME TAX ON NONRESIDENT PENSION INCOME (2024)

You asked whether Connecticut could impose state income tax on Connecticut state pension income paid to a nonresident.

SUMMARY

Connecticut is barred by federal law from imposing Connecticut state income tax on a Connecticut state pension paid to someone who lives in another state. The federal law, enacted in 1996, prohibits states from taxing most retirement income paid to nonresidents (4 U.S.C. § 114). Although Connecticut law subjects certain kinds of nonresident Connecticut-source income to the income tax, state regulations expressly exclude pension or retirement income nonresidents receive from former employers located in Connecticut (CGS § 12-711; Conn. Agencies Reg. § 12-711(b)-12).

FEDERAL PROHIBITION ON STATE INCOME TAXATION OF CERTAIN PENSION INCOME

Federal law bars states from imposing income taxes on “retirement income” received by someone who is not a resident of the taxing state. Under the federal law, residency must be determined according to the laws of the taxing state. The federal prohibition covers income from most pension and retirement income plans defined in the federal Internal Revenue Code, including:

1. governmental plans,

2. individual retirement accounts (IRAs and Roth IRAs),

3. eligible deferred compensation and annuity plans (457 and 403 plans),

4. simplified employee pensions (SEP plans), and

5. military retired or retainer pay (4 U.S.C. § 114).

The federal statute was enacted on August 3, 1996 and applies to retirement income received after December 31, 1995. The law was proposed by Nevada legislators concerned about California levying its state income tax on Nevada residents' retirement income from former California employers.

Before the federal law was enacted, 10 states imposed state income taxes on some or all nonresident pension income: Arizona, California, Kansas, Louisiana, Massachusetts, Minnesota, New York, Oregon, Vermont, and Wisconsin. Four states, Colorado, Mississippi, Montana, and Utah, had laws allowing such taxes but did not implement them.

NONRESIDENT INCOME SUBJECT TO CONNECTICUT INCOME TAX

Although Connecticut adopted its state income tax four years before the federal law passed, it has never applied the tax to nonresident retirement income. But it does subject certain kinds of nonresident income to the tax.

Like other states, Connecticut's income tax is based on two factors: residency and the source of the taxable income. Connecticut residents and part-year residents owe Connecticut income tax based on both factors, while nonresidents owe Connecticut income tax only on income “derived from or connected with” sources in the state. Thus, Connecticut law and regulations define both a “nonresident” and the nonresident “Connecticut-source” income subject to the tax.

Nonresident

Under Connecticut law, a nonresident is someone who meets either of the following conditions:

1. if the person has a legal residence (domicile) outside Connecticut, he or she did not maintain a permanent residence in the state at which he or she spent more than 183 days during the taxable year, or

2. if the person has a legal residence in Connecticut, he or she (a) did not maintain a permanent residence here, (b) did maintain a permanent residence in another state, and (c) did not spend more than 30 days in Connecticut during the taxable year (CGS § 12-701 (1), (5)).

Connecticut-Source Income

A nonresident may owe Connecticut income tax if he or she has income “derived from or connected with sources within this state.” By law, such income is any income, gain, loss, and deduction attributable to the following activities or sources:

1. owning or disposing of interests in real or tangible personal property in Connecticut;

2. carrying on a business, trade, profession, or occupation in Connecticut or receiving income from intangible personal property employed in such a purpose;

3. owning shares in a Connecticut S corporation;

4. receiving winnings from gambling in the Connecticut state lottery, if the winnings must be reported to the IRS (IRS regulations require payers to report winnings exceeding $600 or 300 times the price of the wager, whichever is more); or

5. a nonresident athlete, entertainer, or performing artist receiving income from (a) an event occurring in the state or (b) the closed-circuit or cable t.v. transmission of in-state events, if the transmissions are received or shown in Connecticut and the events do not occur on a regularly scheduled basis (CGS § 12-711).

Certain nonresident income is excluded from Connecticut-source income, either by statute or by Department of Revenue Services regulations. Among these are (1) compensation paid for active-duty military service in the state and (2) income from a pension or retirement plan (Conn. Agencies Regs., § 12-711 (b)-1 and 12).

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